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Dynamic Relationship among the Stock Market and the Macroeconomic Factors

Author

Listed:
  • Ram Chandra Bhattarai

    (Ram Chandra Bhattarai, Associate Professor, Patan Multiple Campus, Tribhuvan University, Kathmandu, Nepal. Email: rbhattarai1@yahoo.com)

  • Nayan Krishna Joshi

    (Nayan Krishna Joshi (corresponding author), Tribhuvan University, Kathmandu, Nepal. Email: nayankrishnajoshi@gmail.com)

Abstract

This article examines the dynamic relationship among the stock market and macroeconomic factors for the stock market of Nepal. The study documented both short-run and long-run interdependence among stock index and some macroeconomic variables. The estimated results suggest unidirectional short-run (positive) causal relationship running from consumer price index (CPI) to stock index but reverse causality in the long run (from stock index to CPI), supporting the widely-held view that stock returns are a hedge against inflation. The multivariate results also confirmed absence of long-run causality but supported positive and unidirectional relationship flowing from money supply to stock index in the short run. Nevertheless, the multivariate results revealed longrun causality running from stock index to treasury bill rate but no short-run linkage. The variance decompositions results showed a strong relative exogeneity of stock index, while the impulse response graphs showed that the response of stock index to shocks in macroeconomic variables didn’t persist for long period. The policy implication of the study is that monetary authority in Nepal would be able to influence the stock market only in the short run, but not in the long run, either directly through its intermediate target (money supply) and its impact on the inflation or indirectly through increased access to the financial services.

Suggested Citation

  • Ram Chandra Bhattarai & Nayan Krishna Joshi, 2009. "Dynamic Relationship among the Stock Market and the Macroeconomic Factors," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 10(2), pages 451-469, July.
    • Handle: RePEc:sae:soueco:v:10:y:2009:i:2:p:451-469
    DOI: 10.1177/139156140901000208
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    References listed on IDEAS

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    More about this item

    Keywords

    JEL: C12; JEL: C22; JEL: G14; Macroeconomic Factors; Multivariate Cointegration; Nepal Stock Exchange; Vector Error Correction Model;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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