Impact of Macroeconomic Variables on Stock Performance; Evidence from Developed and Developing Countries

Abstract

The increasing importance of the stock market in the economic development has been very rapid in the last few decades. Moreover, there is also an increasing importance of economic activity in stock market development. This indicates that there is a strong interaction of the stock markets with the economic activity, which has been subject of much research recently. The main aim of this study is to examine the effect of macroeconomic variables on stock index prices. The importance of this impact is related to the Efficient Market Hypothesis (EMH), which assumes that stock prices reflect all available information from the market and economic activity. The main macroeconomic variables which are hypothesized to have a strong impact in stock prices are interest rate, inflation rate, exchange rate, money supply and industrial production. From the comparative study conducted between five developed countries; namely United States (US), United Kingdom (UK), Japan, Canada and Germany and five developing countries, including Brazil, Russia, India, China and South Africa (which stands for BRICS group) by using the cointegration analysis it is observed that the macroeconomic data have a long term association with the stock index prices only in US, Japan and South Africa. Based on the cointegration results, the Vector Autoregressive (VAR) and Vector Error Correction Method (VECM) analysis are applied. From these analyses, it is observed that there is quite a strong impact of macroeconomic variables in stock prices of developed countries, especially in US, Germany and Canada. On the other hand, from the BRICS group only in South Africa a strong explanatory power of macroeconomic variables in stock prices is observed, while in the other countries the impact is very poor. Lastly, because of the increasing impact of globalization a short study of how US macroeconomic variables affect the stock markets of the above mentioned countries is undertaken. From the VAR analysis it is observed that the US economy has strong impact in the stock markets of those countries with which it has a close economic and financial activity and especially the US industrial production is found to have a strong positive impact in the stock markets of all these countries. The findings of this study give evidence on stock market behavior relative to the economic activity for specific countries, which is of important use for stock market analysts for investment options and especially for EMH analysis; for stock efficiency purposes.