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Causality Relationship between Macroeconomic Variables and Stock Market Development: Evidence from Bahrain

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  • Hisham Handal Abdelbaki

Abstract

This paper investigates the relationship between macroeconomic variables and Bahraini stock market development by using the Autoregressive Distributed Lag model. The development of a financial market is closely related to the overall development in the national economy. Well functioning financial system achieves efficiencies that provide good and easily accessible information, lower transaction costs and efficient resource allocation then boost economic growth. Many macroeconomic variables have significant effects on a stock market and its functions, development, and role in the national economy. The central bank actions, governmental policies and individual behavior affect the financial system development. For instance, monetary policy links with stock market development through affecting money supply, interest rates, investment activities in stocks and the market values of stocks. Expansion monetary policy raises money supply, decreases interest rates and raises investment in stocks and market values of stocks. A similar effect can be done by fiscal policy but the effect will be gone directly through interest rates and investment. The main findings of the paper are that income level, domestic investment, banking system development; private capital flows and stock market liquidity are important determinants of Bahraini stock market development. The results of the paper support the theoretical and empirical literature on macroeconomic variables and stock market development nexus.

Suggested Citation

  • Hisham Handal Abdelbaki, 2013. "Causality Relationship between Macroeconomic Variables and Stock Market Development: Evidence from Bahrain," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(1), pages 69-84.
    • Handle: RePEc:ibf:ijbfre:v:7:y:2013:i:1:p:69-84
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    2. Ebele Sabina Nsofor, 2016. "Impact of Investment on Stock Market Development in Nigeria," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 5(1), pages 1-11.
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    4. Tatjana SPASESKA & Ilija HRISTOSKI, 2022. "How Do The Macroeconomic Determinants Underpin The Capital Market Development In North Macedonia?," Management and Marketing Journal, University of Craiova, Faculty of Economics and Business Administration, vol. 0(2), pages 286-325, November.
    5. K. Latha & Sunita Gupta & Arnav Kumar, 2016. "Relationship between Indian Stock Market Performance and Macroeconomic Variables: An Empirical Study," International Journal of Financial Markets, Research Academy of Social Sciences, vol. 2(4), pages 109-121.

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    More about this item

    Keywords

    Macroeconomic Variables; Stock markets Development; Autoregressive Distributed Lag Model; Bahrain;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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