Macroeconomic Factors Influencing Stock Market Returns: An Empirical Study of Western European Countries

Abstract

This thesis investigates the impact of key macroeconomic variables, including crude oil prices, interest rates, money supply growth, exchange rates, and consumer price index (CPI), on stock market returns for six Western European countries (Belgium, Austria, the Netherlands, France, Germany, and Switzerland) over the period from January 2020 until February 2025. Employing ARDL/PMG the study examines both long-run and short-run dynamics, complemented by diagnostic tests for normality, stationarity, serial correlation and heteroskedasticity and error correction tests. The long-run findings reveal that crude oil prices and money supply growth have a significant negative impact on stock market returns, while interest rates exhibit a significant positive effect. In opposition to this, the coefficients for exchange rates and CPI do not have significant effects on stock market returns. In short-run analysis, however, only CPI and exchange rates demonstrate significant negative effects on stock market returns, indicating that financial markets respond swiftly to exchange rate volatility and inflationary shocks. The negative and highly significant error correction term indicates the presence of long-term equilibrium relationship and suggests a quick adjustment to correct short-term deviations. These findings highlight the dual nature of stock market dynamics in Western Europe.