Today’s Topic of discussion: The impact of selected micro and microeconomic variables on the stock prices of the emerging stock market: A case of Dhaka Stock Exchange (DSE)
The impact of selected micro and microeconomic variables on the stock prices of the emerging stock market: A case of Dhaka Stock Exchange (DSE)
History has shown that the price of stocks and other financial assets is an important aspect of the dynamics of economic activity, performing a vital role in national economies. Stock prices can be an indicator of social mood and a leading indicator of real economic activity.
Therefore, economic policymakers keep an eye on the behavior and supervision of the stock market, as its smooth and risk-free operation is essential for economic and financial stability. Investment in the stock market with the intent of generating a positive return without risk is complicated and challenging. Investment in stocks involves risk and uncertainty and the capital market helps manage these risks and uncertainty through the construction of an efficient portfolio.
Therefore, ‘Portfolio Theory’ which was innovated and developed by economists and finance scholars, was a significant breakthrough in financial economics. An effectively diversified portfolio minimizes the unsystematic risk which is affected by factors that are specific to the firms and, to some extent, the industry in which the firm operates.
The unsystematic risk is, therefore, manageable by diversification. The systematic risk, however, can not be managed by a simple approach of diversification. In addition to market-oriented anomalies, many other factors contribute to the systematic risk of the portfolio. Macroeconomic variables have systematic effects on stock market returns. Asset prices depend on their exposure to the fundamental variables describing the economy.
Any systematic variable that affects the economy at the same time affects the returns of a single stock, and consequently the stock market return as a whole. Therefore, market-oriented anomalies and systematic macroeconomic variables are vital responsible factors for any rise and fall in stock prices. This research incorporates an interesting attempt to identify those factors that influence and cause the volatility in stock prices in Dhaka Stock Exchange (DSE).
Few market-oriented indicators (i.e. market capitalization, market dividend yield, market earnings per share, market price to earnings multiples, and market trading volume) and few macroeconomic indicators (i.e. consumer price index, deposit interest rate, foreign exchange rate, export receipt, foreign exchange reserve, per capita gross domestic product, import payment, investment at current market price, industrial production index, broad money supply, national income deflator, foreign remittances, and total domestic credit) have been incorporated to explain the behavior short run and long-run behavior of stock prices in Dhaka Stock Exchange (DSE).
In this research, ‘Multivariate Time Series Regression Analysis’ has been applied to identify a short-run discrete relationship with stock price in Section:
A; ‘Johansen’s Cointegration Test’ has been applied to estimate long-run equilibrium relationship with a stock price; ‘Vector Error Correction Model’ has been applied to estimate short-run dynamics (i.e. disequilibrium) adjustment of stock prices that leads to the convergence towards long-run equilibrium relationship with other variables and finally, ‘Toda-Yamamoto(T-Y) Granger Causality Test’ has been applied for the identification for a long run dynamic causal relationship with stock price in Dhaka Stock Exchange (DSE).
The findings of this research have been summarized and presented below:
Market capitalization has a significant short-run and long-run positive relationship with the stock price.
Bi-directional causality is found to exist between market capitalization and stock price. A significant short-run positive relationship has been found between market dividend yield and stock price but in the long run, the relationship is positive but significant. Uni-directional causality has been found between market dividend yield and stock price.
Market earnings per share have been found to have an insignificant relationship with a stock price both in the short run and long run. In addition, no causal relation is found between them.
Market price-to-earnings multiples have a significant negative relationship with stock price in the short run but in the long run, it is negative but insignificant. Uni-directional causality has been found from market price to earnings multiples to stock price. Market trading volume has an insignificant positive relationship with stock price but in the long run, it is significantly positive. Unidirectional causality has been found from market trading volume to stock price.
The consumer price index has an insignificant positive relationship with stock price and also had uni-directional causality to stock price. The deposit interest rate has an insignificant negative relationship with stock price but in the long run, it is an insignificant positive. However, no causality has been found between them. The foreign exchange rate has a significant negative relationship with stock price but no causality has been found between them.
The relationship between export receipt and stock price is positive but insignificant in the short run but in the long run, it is negative and significant. In addition, bi-directional causal relation exists between them. On the other hand, foreign exchange reserve has an insignificant positive relationship with stock price and has unidirectional causality from foreign exchange reserve to stock price. Per capita, GDP has a significant negative relationship with a stock price both in the short run and long run.
However, bi-directional causality has been found between them. Import payment has an insignificant relationship with stock price in the short run but in the long run, the relationship is positive and significant. Unidirectional causality has been found between import payment and stock price. Aggregate investment has a significant negative relationship with stock price in the short run but in the long run, it is positive and significant.
In addition, uni-directional causality has been found in aggregate investment and stock price. The industrial production index has an insignificant positive relationship with stock price but in the long run, it is significantly positive. Bi-directional causality has been found between them. Broad money supply has a significant negative relationship with stock price but a significant positive relationship has been found in the long run.
Uni-directional causality has been found from broad money supply to stock price. National income deflator has a significant negative relationship with stock price in the short run but in the long run, the relationship has been turned to be positive and insignificant. Bi-directional causality has been found between them. Foreign remittance has a significant negative relationship both in the short run and long run and also has uni-directional causality from foreign remittance to stock price. Finally, total domestic credit has a positive but insignificant relationship with stock price in the short run and has no causality with the stock price.
Description:
This thesis was submitted to Dhaka University in conformity with the requirements for the degree of Doctor of Philosophy in Finance.
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