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An Empirical Analysis of the Relationship between Macroeconomic Variables and Stock Prices in Bangladesh

Author

Listed:
  • Afzal, Nasrin

    (Researcher, Institute of Statistical Research and Training (ISRT), University of Dhaka, Bangladesh.)

  • Hossain, Syed Shahadat

    (Professor, Institute of Statistical Research and Training (ISRT), University of Dhaka, Bangladesh.)

Abstract

Establishing the relationship between stock prices and macroeconomic variables is very important for formulating current economic stabilisation policies. This paper investigates the causal relationship between four macroeconomic variables and Dhaka Stock Exchange (D SE) stock prices using cointegration and Granger causality test. The results suggest that cointegration exists between stock prices with each of the variables: M1, M2 and inflation rate, indicating a long-run relations hip exists between them. We find evidence that unidirectional causality exists from stock market to exchange rate and M1 in the short run. From bivariate Error-Correction models we also find that long run causality exists from M1, M2 to stock market and from stock market to inflation rate. These results are further strengthened when we expand the analysis for multivariate settings. Here, we also note some evidence that M2 Granger-cause stock price and the three macroeconomic variables. These results strongly suggest informational inefficiency in DSE market.

Suggested Citation

  • Afzal, Nasrin & Hossain, Syed Shahadat, 2011. "An Empirical Analysis of the Relationship between Macroeconomic Variables and Stock Prices in Bangladesh," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 34(4), pages 95-105, December.
    • Handle: RePEc:ris:badest:0529
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    References listed on IDEAS

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    1. Hall, S G, 1991. "The Effect of Varying Length VAR Models on the Maximum Likelihood Estimates of Cointegrating Vectors," Scottish Journal of Political Economy, Scottish Economic Society, vol. 38(4), pages 317-323, November.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    3. Lutkepohl, Helmut, 1982. "Non-causality due to omitted variables," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 367-378, August.
    4. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February.
    5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Pierre Monnin & Alexander Barkawi, 2015. "Monetary Policy and Sustainability. The Case of Bangladesh," Discussion Notes 1501, Council on Economic Policies.
    2. Shekar Bose & Hafizur Rahman, 2022. "Are News Effects Necessarily Asymmetric? Evidence from Bangladesh Stock Market," SAGE Open, , vol. 12(4), pages 21582440221, October.
    3. Shaikh Mostak Ahammad & Md. Azmir Sharif, 2020. "Investigating the relationships between stock exchanges’ total trade and total value in Bangladesh," International Journal of Science and Business, IJSAB International, vol. 4(9), pages 88-98.
    4. repec:ers:journl:v:vi:y:2018:i:2:p:92-100 is not listed on IDEAS
    5. Rudi Bratamanggala, 2018. "The Factors Affecting Board Stock Price of Lq45 Stock Exchange 2012-2016: Case of Indonesia," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 115-124.
    6. Hossain, Md. Sajib & Hossain, Md. Amzad & Amin, Shabnaz, 2016. "An Empirical Analysis of the Relationship between Monetary Policy Stance and Stock Price in Bangladesh," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 39(1-2), pages 27-57, March-Jun.

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    More about this item

    Keywords

    Stock prices; Macroeconomics; Causality; Stock markets; Exchange rates; Inflation rates; Money supply; Efficient markets; Long run equilibrium; Null hypothesis;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy

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