Dynamic Interaction Between Macroeconomic Fundamentals and Stock Prices in Bangladesh

Mostafa Ali, Gang Sun, Mohammed Ali Arshad Chowdhury

Abstract


This study attempts to investigate whether dynamics in fundamental macroeconomic factors significantly influence the stock prices of Bangladesh by applying cointegration test, Granger causality test based on the Vector Error Correction Model (VECM), Variance Decomposition and Impulse Response Analysis. Johansen and Juselius cointegration test detect six cointegrating vectors and a short-run and long-run relationship is investigated by normalizing the first cointegrating vector corresponding to the largest Eigen-value. We find a long-run positive relationship between stock price and IP, CPI, EX, and RT but a negative relationship between stock price and M2 and interest rate (both TB & GB). Empirical findings of this study reveal that no macroeconomic variables except TB Granger cause stock price in short run. Variance Decomposition analysis shows that most of the stock price variance can be explained by its own shocks in the shorter horizon but its magnitude diminishes over the long horizon which is about 26.77% after 24 months.  Therefore, empirical results suggest that stock prices are weakly exogenous relative to the macroeconomic variables. Findings of the study have important implications to market participants and financial analysts when they have chosen to invest in Bangladesh stock market.


Keywords


macroeconomic variables; cointegration test; VECM; stock prices; Bangladesh

Full Text:

PDF

References


Abdullah, D. A., & Hayworth, S. C. (1993). Macroeconometrics of Stock Price Fluctuations. Quarterly Journal of Business and Economics, 32(1), 50–67.

Abugri, B. A. (2008). Empirical Relationship between Macroeconomic Volatility and Stock Returns: Evidence from Latin American Markets. International Review of Financial Analysis, 17(2), 396–410. http://doi.org/10.1016/j.irfa.2006.09.002

Aggarwal, R. (1981). Exchange Rates and Stock Prices: A Study of the U. S. Capital Markets Under Floating Exchange Rates. Akron Business and Economic Review, 12, 7–12.

Ali, M. B. (2011). Impact of Micro and Macroeconomic Variables on Emerging Stock Market Return: A Case on Dhaka Stock Exchange (DSE). Interdisciplinary Journal of Research in Business, 1(5), 8–16.

Basher, S. A., Hassan, M. K., & Islam, A. M. (2007). Time-Varying Volatility and Equity Returns in Bangladesh Stock Market. Applied Financial Economics, 17(17), 1393–1407. http://doi.org/10.1080/09603100600771034

Bekhet, H. A., & Matar, A. (2013). Co-Integration and Causality Analysis between Stock Market Prices and their Determinates in Jordan. Economic Modelling, 35, 508–514. http://doi.org/10.1016/j.econmod.2013.07.012

Branson, W. H. (1983). Macroeconomic Determinants of Real Exchange Rates. In R. J. Herring (Ed.), Managing Foreign Exchange Risk. Cambridge: Cambridge University Press.

Buyuksalvarci, A., & Abdioglu, H. (2010). The Causal Relationship between Stock Price and Macroeconomic Variables: A Case Study for Turkey. Journal of Economic & Management Perspectives, 4(4), 601–610.

Chang, K.-L. (2009). Do Macroeconomic Variables Have Regime-Dependent Effects on Stock Return Dynamics? Evidence from the Markov Regime Switching Model. Economic Modelling, 26(6), 1283–1299. http://doi.org/10.1016/j.econmod.2009.06.003

Chen, M.-H. (2007). Macro and Non-Macro Explanatory Factors of Chinese Hotel Stock Returns. International Journal of Hospitality Management, 26(4), 991–1004. http://doi.org/10.1016/j.ijhm.2006.04.002

Cheung, Y.-W., & Lai, K. S. (1999). Macroeconomic Determinants of Long-Term Stock Market Comovements Among Major EMS Countries. Applied Financial Economics, 9(1), 73–85. http://doi.org/10.1080/096031099332546

Davis, N., & Kutan, A. M. (2003). Inflation and Output as Predictors of Stock Returns and Volatility: International Evidence. Applied Financial Economics, 13(9), 693–700. http://doi.org/10.1080/09603100210139429

DeFina, R. H. (1991). Does Inflation Depress the Stock Market? Business Review, 3–12.

Diamandis, P. F., & Drakos, A. A. (2011). Financial Liberalization, Exchange Rates and Stock Prices: Exogenous Shocks in Four Latin America Countries. Journal of Policy Modeling, 33(3), 381–394. http://doi.org/10.1016/j.jpolmod.2010.11.004

Dornbusch, R., & Fischer, S. (1980). Exchange Rates and the Current Account. The American Economic Review, 70(5), 960–971.

Fama, E. F. (1981). Stock Returns, Real Activity, Inflation, and Money. The American Economic Review, 71(4), 545–565.

Fama, E. F. (1990). Stock Returns, Expected Returns, and Real Activity. The Journal of Finance, 45(4), 1089–1108. http://doi.org/10.1111/j.1540-6261.1990.tb02428.x

Frankel, J. A. (1983). Monetary and Portfolio-Balance Models of Exchange Rate Determination. In J. S. Bhandari & B. H. Putnampp (Eds.), Economic Interdependence and Flexible Exchange Rates. Cambridge: MIT Press.

Gupta, R., Yuan, T., & Roca, E. (2016). Linkages between the ADR Market and Home Country Macroeconomic Fundamentals: Evidence in the Context of the BRICs. International Review of Financial Analysis, 45, 230–239. http://doi.org/10.1016/j.irfa.2016.04.004

Hsing, Y., & Hsieh, W. (2012). Impacts of Macroeconomic Variables on the Stock Market Index in Poland: New Evidence. Journal of Business Economics and Management, 13(2), 334–343. http://doi.org/10.3846/16111699.2011.620133

Humpe, A., & Macmillan, P. (2009). Can Macroeconomic Variables Explain Long-Term Stock Market Movements? A Comparison of the US and Japan. Applied Financial Economics, 19(2), 111–119. http://doi.org/10.1080/09603100701748956

Ibrahim, M. H., & Aziz, H. (2003). Macroeconomic Variables and the Malaysian Equity Market: A View Through Rolling Subsamples. Journal of Economic Studies, 30(1), 6–27. http://doi.org/10.1108/01443580310455241

Johansen, S. (1988). Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamics and Control, 12(2–3), 231–254. http://doi.org/10.1016/0165-1889(88)90041-3

Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59(6), 1551–1580. http://doi.org/10.2307/2938278

Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration — With Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210. http://doi.org/10.1111/j.1468-0084.1990.mp52002003.x

Kasa, K. (1992). Common Stochastic Trends in International Stock Markets. Journal of Monetary Economics, 29(1), 95–124. http://doi.org/10.1016/0304-3932(92)90025-W

Kim, K. (2003). Dollar Exchange Rate and Stock Price: Evidence from Multivariate Cointegration and Error Correction Model. Review of Financial Economics, 12(3), 301–313. http://doi.org/10.1016/S1058-3300(03)00026-0

Kwon, C. S., & Shin, T. S. (1999). Cointegration and Causality Between Macroeconomic Variables and Stock Market Returns. Global Finance Journal, 10(1), 71–81. http://doi.org/10.1016/S1044-0283(99)00006-X

MacKinnon, J. G., Haug, A. A., & Michelis, L. (1999). Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration. Journal of Applied Econometrics, 14(5), 563–577. http://doi.org/10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R

Maysami, R. C., Howe, L. C., & Rahmat, M. A. (2005). Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of Singapore’s All-S Sector Indices. Jurnal Pengurusan, 24, 47–77.

Mukherjee, T. K., & Naka, A. (1995). Dynamic Relations Between Macroeconomic Variables and the Japanese Stock Market: An Application of a Vector Error Correction Model. Journal of Financial Research, 18(2), 223–237. http://doi.org/10.1111/j.1475-6803.1995.tb00563.x

Narayan, S., & Narayan, P. K. (2012). Do US Macroeconomic Conditions Affect Asian Stock Markets? Journal of Asian Economics, 23(6), 669–679. http://doi.org/10.1016/j.asieco.2012.05.001

Noman, A. M., Humayun Kabir, S., & Bashar, O. K. M. R. (2012). Causality Between Stock and Foreign Exchange Markets in Bangladesh. Studies in Economics and Finance, 29(3), 174–186. http://doi.org/10.1108/10867371211246849

Patra, T., & Poshakwale, S. (2006). Economic Variables and Stock Market Returns: Evidence from the Athens Stock Exchange. Applied Financial Economics, 16(13), 993–1005. http://doi.org/10.1080/09603100500426523

Peiró, A. (1996). Stock Prices, Production and Interest Rates: Comparison of Three European Countries with the USA. Empirical Economics, 21(2), 221–234. http://doi.org/10.1007/BF01175971

Peiró, A. (2016). Stock Prices and Macroeconomic Factors: Some European Evidence. International Review of Economics & Finance, 41, 287–294. http://doi.org/10.1016/j.iref.2015.08.004

Phillips, P. C. B., & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75(2), 335–346.

Ratanapakorn, O., & Sharma, S. C. (2007). Dynamic Analysis Between the US Stock Returns and the Macroeconomic Variables. Applied Financial Economics, 17(5), 369–377. http://doi.org/10.1080/09603100600638944

Sampath, T. (2011). Macroeconomic Variables and Stock Prices in India: An Empirical Analysis. The IUP Journal of Monetary Economics, 9(4), 43–55.

Santos, A. S. dos, Neto, A. R., de Araujo, E. C., de Oliveira, L., & Abrita, M. B. (2013). Interaction between Macroeconomics Variables and IBOVESPA, the Brazilian Stock Market’s Index. Transnational Corporations Review, 5(4), 81–95. http://doi.org/10.1080/19186444.2013.11658374

Schwert, G. W. (1990). Stock Returns and Real Activity: A Century of Evidence. The Journal of Finance, 45(4), 1237–1257. http://doi.org/10.1111/j.1540-6261.1990.tb02434.x

Serletis, A., & King, M. (1997). Common Stochastic Trends and Convergence of European Union Stock Markets. The Manchester School, 65(1), 44–57. http://doi.org/10.1111/1467-9957.00042

Smyth, R., & Nandha, M. (2003). Bivariate Causality between Exchange Rates and Stock Prices in South Asia. Applied Economics Letters, 10(11), 699–704. http://doi.org/10.1080/1350485032000133282

Wongbangpo, P., & Sharma, S. C. (2002). Stock Market and Macroeconomic Fundamental Dynamic Interactions: ASEAN-5 Countries. Journal of Asian Economics, 13(1), 27–51. http://doi.org/10.1016/S1049-0078(01)00111-7




DOI: https://doi.org/10.28992/ijmbe.v1i1.53

Refbacks

  • There are currently no refbacks.


Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.