The relationship between the stock market at different time scales and the micro-economy exists. The economic effects of the stock market include effects on wealth and pensions.
Early studies by various parties show that there are a number of variables that have extremely weak associations against the stock prices. Their influences on the stock market are also almost negligible. For example, Ely &Robinson, (1237-1243), argue that variables like the country’s fiscal deficit or a country’s foreign institutional outlay in the capital market have unusually insignificant pressure on the stock market. This is in line with prior studies that show that during the post world war era, single variables such as money supplies and overall inflation rates are the dominant variable controlling the stock market. This, therefore, sets out the study, as it tends to confirm the traditional belief in relations to the link between macroeconomic variable and the stock prices, that states that the real economic variable affect the stock market
Selection of Variables
According to Engsted, & Tanggaard, (22), the main macroeconomic variable, which are instrumental in the analysis of the correlation between the stock market and the macroeconomic variables includes variable such as prices of goods, supply of money, the real economic activities, the spot and predicted exchange rates, the prevailing interest rates. Other include political risks, the prices of oil, the trade sector, budgetary deficits, trade deficits, overall domestic consumption, rate of unemployment in the country, amount of imports and the overall regional stock market indices and a real wage. However, not all variables listed above are relevant in the emerging stock market. It is, therefore, necessary to narrow done according to the level of importance to these emerging stock markets. This paper seeks to analyze the linkage between the macroeconomic variable, it is, therefore, advisable to consider the above statement and balance the theoretical propositions while basing the argument on the prior evidence. In this view, there are only four macroeconomic variables that meet the above criteria. These variables are the exchange rate, inflation rate, money supply, and interest rate (Ely, & Robinson, 173; Engsted, Tanggaard, 665; Gallagher, & Taylor, 212)
It is necessary to note that, in order to get optimal results, the multiple regression must be run with all the macroeconomic variable measured. It is also advisable to give the money supply and the overall rate of inflation one-month lags. While available literature reveals a significant relationship between the variation in stock returns and the general level of inflation in countries, there is a negative correlation between the stock return and the expected inflation. On the other hand, common stock is an effective hedge, such that they are instrumental in the reduction of risks of any real return to investors. This stems from the general uncertainty associated with the future prices of goods.
Additionally, Geske, & Roll, (342), tried to examine the association between monthly stock turns against inflation during the post world war periods and realized that the correlation is negative. This was regarding both the expected and unexpected inflation. However, it was quite exciting to note that the same negative correlation was realized using US data. This is enough emphasis of the relationship between stock and inflation. However, the future level of consultation in a country and the price changes in a country can be effective in determining the movement of stocks. Stocks only appraise if the price of god in a country increases so is the level of consumption. Some of the countries in which the future prices of goods have become handy in determining the movement of stock include Sri Lanka and Nigeria
The negative impact of the expected and unexpected inflation on the stock returns is as a result of the demand for money and the classical quantity theory of money. The relationship between the behavior of stocks and unanticipated variation under alternative fiscal policy regimes is negative. This is because these countries have no fiscal policy changes and are uncertain abound the imminent changes in the value of their currencies. The negative impact of inflation of stock is due to real economic fluctuation. This fluctuation occurs due to the fluctuation in the economic variable or real and monetary fluctuation Ely, & Robinson. (237), argue that any rise in the value of the expected fluctuation has a reductive effect on the prices of equity in both India and USA
Money supply and stock
There is considerable debate of the relevance of money and its role as and indicators in the prices of stocks. According to Gjerde, & Saettem, (123), an increase in the money translates into an increase in the equity returns. There is consistency in the relationship between the leads or lags and cross spectra of returns on stocks and variations in the supply of money. This is also consistent with the classical; Efficient Market Model. Harvey, (199), also argues that this is also true with the monetary portfolio model. This is because; the returns in stock anticipate changes in the monetary returns. On the other hand, Gjerde, & Saettem, (123), argues that considering the past US data, The past changes in the supply of money do not provide better predictive information on the future variation in the prices of stocks. Consequently, it is healthy to assume that any of the changes in the supply of money may not have a considerable impact in the value of stocks and may not be used to predict the value of stocks. This view upholds the Efficient Market Hypothesis. However, Harvey (192), went on to confirm that the theory postulated by neoclassical economics that expansionary monetary policy can increase the stock returns holds
The relationship among stock returns, real activity, inflation and money supply changes
While investigating the relations among stock returns, real activity, inflation and money supply changes, used the US data to investigate the relationships. He argues that, the empirical results are consistent with the reversed causality model when he administered the model on the US and Japanese market, Ely, & Robinson., (456), realize that the economic news has a significant systematic impact on the stock market returns. Additionally, term and risk premiums receive significant pricing in the US
In the European countries, found that their a correlation between the macroeconomic variable and the stock prices are positive. This is due to the same relationship between industrial productivity, the supply of money and the stock prices. However, the results also proved some of the original findings such as the negative correlation between inflation and interest rates. On the other hand, Asprem, (89), findings only supported the early findings by Ely, & Robinson. (121), he argues that there is a negative impact of the interest rates on the stock prices because, any changes in the interest rates attracts other investment options in various sectors. Nevertheless, money growth impact positively the stock returns.
The first impact of a fall in the stock market is that those with shares will see a fall in their wealth. For a significant fall, they will see their wealth affecting their financial outlook. Thus, they will be sceptic to spend more money if they are losing money on shares. This will result in falling consumer spending, even though people who buy shares are often prepared to lose money whichever way the stock markets move. The spending patterns are independent of share prices. The stock market movements indirectly affect those with private pension or investment trust. With significant investments of pension funds in the stock market, a serious fall in share prices reduces the value of the pension funds, thus future pension payouts will be lower. Share price movements are reflections of what is happening in the economy; falling share prices can affect consumer confidence by discouraging people from spending. Again falling share prices can hinder companies from raising finance in the stock market. For example, companies that are expanding and wish to borrow often do so by issuing more shares, which is more difficult. In some instances, a fall in the stock market makes other investments to bemore attractive. Government bonds or gold which offer better returns in times of uncertainty may attract people away from investing in shares.
The Stock Market Predicts Movements in Macroeconomic Variables
Finance is what makes the business go around in the world and aspects of the economy start and end with it. The easiest way for new, upcoming and promising ventures is to go public or turn to the masses through stock markets. That is, small savings of people if invested wisely in reliable businesses can make miracles. Only a small proportion of the total population invests in the stock market, but if something happens in these stock markets, it affects the whole population directly or indirectly. There is a strong correlation between stock markets and the real economy
Asprem, (89), argue that these macroeconomic variables are moving in the same direction but are not fundamentally caused by each other. There is no relationship effect of the stock exchange indicator and the real gross domestic product. There are some other exogenous variables which influence them. When the valuation of shares of firms traded in the stock market increases they have a positive influence on the gross domestic product of a country. Just like forex reserves causes gross domestic product of a country in a positive manner; the bulk of this foreign exchange reserves coming from foreign institutional investments. The presence of autocorrelation between the stock market and macroeconomic variables implies that there is evidence of bidirectional relationship between interest rate and stock market, exchange rate and stock market, etc. Any change of exchange rate, interest rate, and international market significantly affect the stock market in the economy and vice versa. Therefore, the changing behaviour of international market, exchange rate, and interest rate in the economy can be used to predict stock market price fluctuations. These relationships may differ from region to the region, as a positive relationship between stock returns and economic activities cannot be found in other markets.
Movements in Macro Variables provide information about the future direction of the stock market
According to Samarakoon, (1210), money supply can also have a significant impact on share prices. Therefore, stock prices should accurately reflect future economic activities, and is therefore, important in the formulation of a nation’s macroeconomic policy. Macroeconomic indicators determine the stock market efficiently to give a new approach to the foreign investors, policy makers, traders, domestic investors, and academic researchers in their decision making. The rate of inflation, money growth, interest rates, industrial production, reserves, and exchange rates are the most used macroeconomic indicators to explain the stock market movement. Inflation has negative effects on the stock market. Exchange rate movements initially affect the international competitiveness and trade position, then the real output of a country, and finishes with the current and future cash flow of companies. Using historical data of stock prices and microeconomic indicators may enable the traders and investors to strategize on more profitable trading and investment decision to take. Though, care should be taken so as to include more macroeconomic variables to add to the analysis so as to know the relationship between these factors and the nature of stock market volatility. It may also be that macroeconomic variables have a different impact on the stock market volatility depending on the trading mechanisms and regulatory environments (Wasserfallen, 19; Solnik, & Solnik, 137; Samarakoon, 360; Humpe, & Macmillan 113).
The Nature of the Dynamic Relationship
The returns of industry portfolios predict stock market movements. Retail, services, commercial real estate, metal, and petroleum predict the stock market. Stock markets react with a delay to the information contained in industry returns. Evaluating macroeconomic variables such as unemployment rates, nominal exchange rates, federal funds rates, aggregate output, money stocks, and inflation rates, the federal government debt, reveals that they can predict recessions in the stock market. Using both parametric and non parametric approaches can identify recessions periods in the stock market. It is easier to predict bear markets using macroeconomic variables when comparing bear market prediction and the stock return predictability (Canova, & De Nicol, 345-349).
A co integration analysis can be used to model the long term relationship between the consumer price index, industrial production, money supply, long term interest rates, and stock prices. Stock prices are positively related to industrial production and negatively related to both consumer price index and the long term interest rate. There is a small, insignificant positive relationship between money supply and stock prices. Property index and stock market form co-integrating relationship with changes in the short and long term interest rates (Booth, & Booth, 217; Bilson, Brailsford, & Hooper, 200).
Security prices adjust rapidly on arrival of new information thus current prices reflect all information about the security. Therefore, no investor should be able to employ available information so as to forecast stock price movements quickly in order to make a profit by trading in shares. National macroeconomic policies can be made so as to reflect future corporate performance, and corporate profits reflect the level of economic activities.
Barrows, & Naka, (1294), states that the dynamic interactions and the causal relations among macroeconomic variables and stock prices are crucial in the formulation of a country’s macroeconomic policy. Relevant information currently known about the changes in macroeconomic variables is fully reflected in current stock prices. Therefore, competition among the profit maximising investors in an efficient market will not be able to make abnormally high profits by predicting future stock market changes (Hong, Torous & Valkanov 368)
In regression models, if the stock market returns are used as dependent variables, and macroeconomic variables taken as independent variables, will reveal that only consumer price index have a significant effect. Crude oil prices, treasury bills, and exchange rate do not have significant influence on the stock market returns. This implies that there is a trade off between risk and return when investors withhold stocks. It also serves as a guide to risk management. Therefore, companies should undertake viable projects that boost performance over time. Most investors are motivated to invest in companies that have substantial financial performance. The shares become the preferred assets. The effect of macroeconomic variables on the stock market has implications on the financial markets. In forecasting stock market viability, insights on the formulation and implementation of appropriate monetary and fiscal policies could manage stabilize the financial markets (Asprem, 289).
Applying and employing vector error correction and co integration analysis provides more robust and consistent estimates of the effects of macroeconomic variables. With increasing share prices, it is worth considering the impact of the stock market on the economy. An in depth analysis should always be taken to decipher the impact of falling share prices on the economy and the average consumers (Samarakoon, 19).
The dynamic linkage can also be investigated using the Granger’s concept. The Granger’s type causality procedure when applied determines the direction of causation among variables. This procedure is based on a bivariate system time series.
The GARTH time series model has several constrained parameters. The confidence limit of the structural parameter is not constrained itself. Although, the confidence limits can be affected by estimates of the remaining parameters that occur in the region of their constrained areas. A survey of univariate models of conditional heteroskedasticity is the classical ARCH model, and various extensions of the standardized ARCH model. The Exponential GARCH model is stochastic in nature. The stochastic volatility in asset returns is a significant concern of financial economists. It is essential to consider risk, and investors want a premium for investing in risky assets. Value at risk models is mainly used by banks and other financial institutions to model and forecast volatility, or covariance structure of asset returns. Other aspects of return series especially their marginal distributions are leptokurtic. These returns are modelled as independent and identically distributed over time. Models of Autoregressive Conditional Heteroskedasticity (ARCH) form the most popular way of parameterizing this dependence.
Volatility forecasts obtained from a variety of mean and variance specifications in GARCH models is computed as a proxy of actual volatility calculated using daily data. An intriguing by-product is evidence of signiﬁcantly negative relation between unexpected
Volatility and stock returns. Vector autoregresions are useful in finance because they give a concise way of summarizing data, have little serial correlation residuals, and can be used to examine complex relationships among variables. Vector auto regression is not an intelligent causal model of the data as it offers ways to summarize data for two or more variables. It summarizes correlations in data and especially useful if variables are serially correlated. Macroeconomics therefore, helps to describe and summarize macroeconomic data, make forecasts, quantify the structure of the macro economy, and advise the macroeconomic policy maker (Bilson, Brailsford, & Hooper, 21; Barrows, Naka, 194;.Asprem, 989-989).
In an investigation regarding the effects of the macroeconomic variable on the prices of stocks, the multiple regression models exhibited a rather exciting result. Because out of the 35 stocks analysed, 27, stocks showed higher explanatory power. This provides better evidence on the applicability of the macroeconomic variable on the stock prices. The stock prices have various relationships including inverse relationship between stock prices and the exchange rates, inflation rates and treasury rate. Negative and positive impacts of the macroeconomic variable on the stocks prices had a number of practical implications. From their study, Booth, & Booth, (1997), found that the prices of stocks react negatively to any rise in the interest rates of a country. This is probable due to the expected returns on stocks.
Stock prices only react negatively to any rises in the interest rates and not to fall in the interest rates. High interest rates affect the returns on the stocks; this causes the prices of the stocks. If the interest rates on the on the security issued by the treasury such as the T-bill increases, the investors switch out of those stocks that are responsible for the overall fall in the stock prices. This provides a certain level of certainty in the predictability of the stock prices by analysis of the behaviour of the treasury bills. On the other hand, money supply reacts to the stocks prices in a positive manner. For this, any changes in the money supply impact the prices of equity. The most influential macroeconomic variable that is useful has a strong link to the prices of stocks is the exchange rate. This is because, in an export dominant economy, appreciation in the currency has a positive boost on the stock market. However, any depreciation in the value of the country’s currency has a negative impact on the value of the stock prices. On this line, it is healthy to argue that the exchange rate has a high impact as a macroeconomic variable on the stock prices (Chen, 221).
Ely, D.P., and Robinson., K.J., . Are stocks a hedge against inflation? International evidence using a long-run approach. Journal of International Money and Finance 16, 141- 167. (1997)
Engsted, T., Tanggaard, C., . The relation between asset returns and inflation at short and long horizons. Journal of International Financial Markets, Institutions & Money 12, 101– 118. (2002)
Gallagher, L. A., & Taylor, M. P. The stock return–inflation puzzle revisited. Economics Letters, 75, 147–156. ( 2002).
Geske, R., & Roll, R.. The monetary and fiscal linkage between stock returns and inflation. Journal of Finance, 38, 1–33. (1983)RESS
Gjerde, O., and Saettem, F., . Causal relations among stock returns and macroeconomic variables in a small open economy. Journal of International Financial Markets, Institutions and Money 9, 61-74. (1999).
Harvey, C.R., . Predictable risk and return in emerging markets. Review of Financial Studies 8, 773-816. (1995b)
Homa, K.E., & Jaffee, D.M., . The supply of money and common stock prices. Journal of Finance 26, 1045-1066.( 1971)
Karolyi, A. G., & Stulz, R. M. Are financial assets priced locally or globally? In Handbook of the economics of finance, G. Constantinides, M. Harris, & R. M. Stulz (eds.) Amsterdam: North Holland. Monetary regimes and the relation between stock returns an inflationary expectations. Journal of Financial and Qualitative Analysis, 25, 307– 321(2003).
Rapach, D.E., . Macro shocks and real stock prices, Journal of Economics and Business 53, 5-26. (2001)
Samarakoon, L.P., . Stock market returns and inflation: Sri Lankan Evidence. Sri Lankan Journal of Management 1, 293 – 311. (1996b)
Solnik, B., Solnik, V., . A multi-country test of the fisher model for stock returns. Journal of International Financial Markets, Institutions & Money 7, 289–301.(1997)
Wasserfallen, W., . Macroeconomic news and the stock market. Journal of Banking and Finance 13 (4/5), 613–626. (1989)
Zhao, X.. Stock prices, inflation and output: Evidence from China. Applied Economics Letters, 6, 509–511. (1999).
Aggarwal, R. Exchange rate and stock prices. A Study of US Capital Markets Under Floating Exchange Rates, Akron Business and Economic Review 12(2), 7-12. (1981).
Asprem, M., . Stock prices, asset portfolios and macroeconomic variables in ten European countries. Journal of Banking and Finance 13 (4/5), 589–612. (1989).
Barrows, C.W., Naka, A., . Use of macroeconomic variables to evaluate selected hospitality stock returns in the US. International Journal of Hospitality Management 13 (2), 119– 128. (1994).
Bilson, C. M., Brailsford, T. J., & Hooper, V. J. Selecting macroeconomic variables as explanatory factors of emerging stock market returns. Pacific-Basin Finance Journal, 9(4), 401–426. (2001).
Booth, J.R., Booth, L.C., . Economic factors, monetary policy and expected returns on stocks and bonds. Economic Review—Federal Reserve Bank of San Francisco 2, 32–42. (1997).
Hong, H., W. Torous and R. Valkanov (2007). Do industries lead stock markets? Journal of Financial Economics 83, 367-396.
Chen, S-S. Predicting the bear stock market: Macroeconomic variables as leading indicators. Journal of Banking and Finance 33, 211-223. (2009).
Humpe, A. and P. Macmillan Can macroeconomic variables explain long-term stock market movements? A comparison of the US and Japan. Applied Financial Economics 19, 111-119. (2009).
Canova, F. and G. De Nicoló. Stock Returns, Term Structure, Inflation, and Real Activity: An International Perspective. Macroeconomic Dynamics 4, 343-37. (2000).
Get Professional Assignment Help Cheaply
Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?
Whichever your reason is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.
Why Choose Our Academic Writing Service?
- Plagiarism free papers
- Timely delivery
- Any deadline
- Skilled, Experienced Native English Writers
- Subject-relevant academic writer
- Adherence to paper instructions
- Ability to tackle bulk assignments
- Reasonable prices
- 24/7 Customer Support
- Get superb grades consistently
Online Academic Help With Different Subjects
Students barely have time to read. We got you! Have your literature essay or book review written without having the hassle of reading the book. You can get your literature paper custom-written for you by our literature specialists.
Do you struggle with finance? No need to torture yourself if finance is not your cup of tea. You can order your finance paper from our academic writing service and get 100% original work from competent finance experts.
While psychology may be an interesting subject, you may lack sufficient time to handle your assignments. Don’t despair; by using our academic writing service, you can be assured of perfect grades. Moreover, your grades will be consistent.
Engineering is quite a demanding subject. Students face a lot of pressure and barely have enough time to do what they love to do. Our academic writing service got you covered! Our engineering specialists follow the paper instructions and ensure timely delivery of the paper.
In the nursing course, you may have difficulties with literature reviews, annotated bibliographies, critical essays, and other assignments. Our nursing assignment writers will offer you professional nursing paper help at low prices.
Truth be told, sociology papers can be quite exhausting. Our academic writing service relieves you of fatigue, pressure, and stress. You can relax and have peace of mind as our academic writers handle your sociology assignment.
We take pride in having some of the best business writers in the industry. Our business writers have a lot of experience in the field. They are reliable, and you can be assured of a high-grade paper. They are able to handle business papers of any subject, length, deadline, and difficulty!
We boast of having some of the most experienced statistics experts in the industry. Our statistics experts have diverse skills, expertise, and knowledge to handle any kind of assignment. They have access to all kinds of software to get your assignment done.
Writing a law essay may prove to be an insurmountable obstacle, especially when you need to know the peculiarities of the legislative framework. Take advantage of our top-notch law specialists and get superb grades and 100% satisfaction.
What discipline/subjects do you deal in?
We have highlighted some of the most popular subjects we handle above. Those are just a tip of the iceberg. We deal in all academic disciplines since our writers are as diverse. They have been drawn from across all disciplines, and orders are assigned to those writers believed to be the best in the field. In a nutshell, there is no task we cannot handle; all you need to do is place your order with us. As long as your instructions are clear, just trust we shall deliver irrespective of the discipline.
Are your writers competent enough to handle my paper?
Our essay writers are graduates with bachelor's, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college degree. All our academic writers have a minimum of two years of academic writing. We have a stringent recruitment process to ensure that we get only the most competent essay writers in the industry. We also ensure that the writers are handsomely compensated for their value. The majority of our writers are native English speakers. As such, the fluency of language and grammar is impeccable.
What if I don’t like the paper?
There is a very low likelihood that you won’t like the paper.
- When assigning your order, we match the paper’s discipline with the writer’s field/specialization. Since all our writers are graduates, we match the paper’s subject with the field the writer studied. For instance, if it’s a nursing paper, only a nursing graduate and writer will handle it. Furthermore, all our writers have academic writing experience and top-notch research skills.
- We have a quality assurance that reviews the paper before it gets to you. As such, we ensure that you get a paper that meets the required standard and will most definitely make the grade.
In the event that you don’t like your paper:
- The writer will revise the paper up to your pleasing. You have unlimited revisions. You simply need to highlight what specifically you don’t like about the paper, and the writer will make the amendments. The paper will be revised until you are satisfied. Revisions are free of charge
- We will have a different writer write the paper from scratch.
- Last resort, if the above does not work, we will refund your money.
Will the professor find out I didn’t write the paper myself?
Not at all. All papers are written from scratch. There is no way your tutor or instructor will realize that you did not write the paper yourself. In fact, we recommend using our assignment help services for consistent results.
What if the paper is plagiarized?
We check all papers for plagiarism before we submit them. We use powerful plagiarism checking software such as SafeAssign, LopesWrite, and Turnitin. We also upload the plagiarism report so that you can review it. We understand that plagiarism is academic suicide. We would not take the risk of submitting plagiarized work and jeopardize your academic journey. Furthermore, we do not sell or use prewritten papers, and each paper is written from scratch.
When will I get my paper?
You determine when you get the paper by setting the deadline when placing the order. All papers are delivered within the deadline. We are well aware that we operate in a time-sensitive industry. As such, we have laid out strategies to ensure that the client receives the paper on time and they never miss the deadline. We understand that papers that are submitted late have some points deducted. We do not want you to miss any points due to late submission. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it.
Will anyone find out that I used your services?
We have a privacy and confidentiality policy that guides our work. We NEVER share any customer information with third parties. Noone will ever know that you used our assignment help services. It’s only between you and us. We are bound by our policies to protect the customer’s identity and information. All your information, such as your names, phone number, email, order information, and so on, are protected. We have robust security systems that ensure that your data is protected. Hacking our systems is close to impossible, and it has never happened.
How our Assignment Help Service Works
1. Place an order
You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.
2. Pay for the order
Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.
3. Track the progress
You communicate with the writer and know about the progress of the paper. The client can ask the writer for drafts of the paper. The client can upload extra material and include additional instructions from the lecturer. Receive a paper.
4. Download the paper
The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.
PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A PERFECT SCORE!!!