ANALYSIS OF MACROECONOMIC FACTORS AFFECTING STOCK MARKET

АНАЛИЗ МАКРОЭКОНОМИЧЕСКОГО ВЛИЯНИЯ НА ФОНДОВЫЙ РЫНОК

Чжао Цянь

студент, Институт промышленного менеджмента, экономики и торговли, Санкт-Петербургский политехнический университет Петра Великого,

РФ, г. Санкт-Петербург

Тихомиров Антон Федорович

научный руководитель, канд. экон. наук, доц., Санкт-Петербургский политехнический университет Петра Великого,

РФ, г. Санкт-Петербург

ABSTRACT

This artical analyzes the influence of macroeconomic factors on stock markets in different countries. The impact of these indicators may vary depending on the country market observed. The most discussed factors were selected and observed in individual countries to provide a broader view of the importance of each factor.

АННОТАЦИЯ

Эта статья анализирует влияние макроэкономических факторов на фондовые рынки в различных странах. Последствия этих показателей могут отличаться от наблюдаемых на национальном рынке. Были отобраны наиболее обсуждаемые факторы и проведены наблюдения в отдельных странах, с тем чтобы дать более широкое представление о важности каждого из них.

Keywords: Stock market, macroeconomic factors.

Ключевые слова: Фондовый рынок, макроэкономические факторы.

Stock markets have been in the center of attention and viewed as an indicator of economies for many years. The fluctuations occurred in those markets tend to reflect on the economies. To avoid unexpected major instabilities politicians and economies carefully observe the trends and changes in the stock markets.

Economic and political events influence the stock markets and its daily changes. Similarly, it can be affected by domestic macroeconomic situations as well as international state of affairs. The changes in macroeconomic factors have a significant impact on investors and their decision-making process, and, as result, the outcome of their actions. Thus, it is crucial for investors to take into consideration all the possible factors affecting the stock market for the better understanding of the markets.

The most common macroeconomic factors that are selected as influential indicators are interest rate, inflation, money supply, oil place, exchange rate, and industrial production. These factors and the influences on the stock market are frequently explored and analyzed, notably in the form of a case study on specific countries, both long-term and short-term effects.

Interest rates, inflation and stock market relationships are widely discussed in related studies. The two factors have a great impact on the economy in general and as result on the stock markets. Interest rates can affect investors directly and indirectly, as the stock market is usually always affected by it. The impact of interest rate changes can also be felt more immediately in the stock markets while it may take time for those shifts to affect and reveal the changes in the bigger economy. Al Mukit (2013) investigated the effects of interest rates on stock market performance in Bangladesh in 1991 to 2012. It was found that interest rates have a negative effect on the stock market in the long run. Alam and Uddin (2009) examine the relationship between interest rates and stock prices in 1988 to 2003 in 15 developed and developing countries. It was found that there was a negative relationship between the two variables for all the counties. The results are consistent with the results in Norway according to Gjerde and Sættem (1999). Following the results of the reports in can be concluded that in general the lower interest rates, the higher the stock market returns are expected to be.

If the economy experiences high rates of inflation, then the real value of money decreases, which implies a decrease in purchasing power, lower profitability and a decrease in real return on investment. Numerous studies report that stock markets are mostly affected negatively by the inflation rate. Eldomiaty et al. (2019) examined inflation rate and interest rate on stock prices over the 1999-2016 period and showed that inflation rates are negatively related to stock prices. The same conclusion was reported by Reddy (2012) in a case of India stock market over the 1997 – 2009 period. Similarly, Adusei (2014) conducted a study in Ghana, Africa and showed that there is a negative statistically significant relationship between inflation rate and stock returns in the short-run. However, a positive statistically significant relationship was found in the long-run.

Commonly, the results of studies on inflation rate and stock market returns might differ, while the results of studies on interest rates and stock market returns are consistent throughout the different cases, and, generally, show negative relationship between the variables and the stock market. While the relationship between stock market and interest rate is rather straightforward, the inflation rate requires a deeper consideration especially in short- and long-run.

Money supply is used as a monetary policy instrument to restore or maintain stability within an economy.  Such policies cannot be ignored by investors and policymakers. The relationship between the stock market and money supply is another common forecasting way to implement investing strategies among investors. The changes in monetary growth might have a number of different effects on the stock market. Maskay and Chapman (2007) studied the relationship between change in the money supply and the level of stock prices and concluded that a positive money supply shock has a positive influence on the stock prices. Qing and Kusairi (2019) explored an effect of several macroeconomic factors on stock market performance in Malaysia over a period of 21 years (1997-2018). It was concluded that money supply had a positive effect on the Malaysian stock market performance in the short-run. Li (2012) studied the dynamic relationship between the European stock market capitalization and money supply during the debt crisis and the research revealed that stock market capitalization and money supply has an opposite relationship in the long-run, while money supply has a positive impact on stock market capitalization in the short-run. Thus, money supply is an important factor which can explain some fluctuations in the stock market and should be considered in financial related decisions.

Oil prices have a certain influence on the overall stock markets, which can be both directly and indirectly. A direct negative effect might be caused by the fact that an increase in oil price starts financial market’s uncertainties, which as a result might bring a decrease in share prices. Filis (2010) investigated the relationship between oil price, industrial production and stock market in Greece over the 1996–2008 period. In regards to the oil prices, the findings of the study showed that oil prices cause significant negative influence to the stock market in Greece. On other hand Gay (2008) evaluated the association among stock prices and macroeconomic variables in cases of Brazil, Russia, India and China. In the case of oil price and stock market no significant relationship was found. This conclusion can be explained by the fact that that oil prices themselves may not have as much of a great effect in those countries. Bjørnland (2009) explored the relationship between the oil prices and stock market for Norway over the 1993–2005 period. Norway is an oil-exporting country, and as it was expected, the results of the research showed that increases in oil prices lead to an increase in stock market prices. The results suggest oil prices have a different effect for each country and the fact whether the country exports oil should be considered while analyzing this variable.

The relationship between exchange rate and stock market has been widely discussed, however it seems that there is no general agreement on the influence of the macroeconomic variable on the stock market. Abdalla and Murinde (1997) explored the relationship between exchange rates and stock prices in India, Korea, Pakistan and the Philippines in 1985-1994. The results showed unidirectional causality from exchange rates to stock prices in all countries except the Philippines. Mohammad et al. (2009) investigated the role of macroeconomic factors and stock prices in Pakistan over the 1998 – 2009 period. The results show that exchange rate positively affects stock prices, as well as the gross domestic product, while the results of other factors were either negative or insignificant. Nath and Samanta (2004) examines the relationship between foreign exchange and stock market in India for the period from April 1993 to March 2003 using Granger’s causality test in VAR framework and Gweke’s Feedback Measures. According to the results of Granger causality test a significant relationship between returns in foreign exchange and capital markets wasn’t found. However, Gweke’s Feedback Measures reported a strong bidirectional causal relationship between them. Thus, it can be observed that the causal influence of exchange rates on the stock market takes place. However, to specify what kind of effect takes place each country’s market should be analyzed separately.

Changes in industrial production is considered as an indicator that reflects major changes in overall economic activity. Fluctuations in industrial production would influence the expected future cash flows and the productivity of the businesses, hence affecting the stock market performance. Maghyereh, (2002) studied the long run relationship between the Jordanian stock prices and selected macroeconomic variables. The results suggested that the stock price index is cointegrated with a set of macroeconomic variables, including industrial production, which provide a direct long-run equilibrium relation with the stock price index. In the case of a Greek market, Filis (2010) found that industrial production causes a positive influence on the stock market. On the contrary, in Subeniotis et al. (2011) study of 12 European countries between 4 macroeconomic variables and stock market price indices in the 5-year period (2000–2005) found a negative relationship between Industrial Production and stock market movement. The influence of industrial production varies depending on the observed countries. However, it is important to consider the variable as its effect is still significant, whether positive or negative.

Thus, it is important for investors and policymakers to take into consideration macroeconomic factors such as inflation rate, money supply, interest rate, oil place, industrial production and exchange rate. However, in doing so a deeper understanding of the selected country’s stock market should be implemented as the influence of the selected factors might differ for various countries. Additionally, short-run and long-run results appear to be different for some of the selected factors. Selecting the right influenceable indicators to analyze the interested stock market is the key to success of an investor while finding the best opportunities.

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