The long-run relationship between stock indices and economic factors in the ASE: an empirical study between 1989 and 2006

I. INTRODUCTION Some of the roles that a stock exchange can play in a country's economy are the raise of capital for businesses or the creation of investment opportunities for small investors. If these opportunities turn to be profitable, they might give the opportunity to investors for further investments. As a result, apart from the contribution of the stock exchange in the national economy, there is also a contribution to the investors separately. The aim of the study is to investigate for the existence of factors that affect the behavior of stock returns in the ASE for the period between 1989 and 2006. Furthermore, the study examines whether these potential factors are correlated or present any similarities in their influence on stock returns. In order to achieve the objectives of the study specific models were employed, which are the unit root and cointegration models. By applying these models we proceed to an analysis of publicly available financial data in the ASE and macroeconomic data of the Greek economy. The study examines several aspects that could offer new information regarding the way that the ASE functions. The Greek stock exchange is one of the capital markets which proved to be extremely attractive over the last ten years to international investors, as during the 90's it had started the transition to become a developed market. Investors and analysts have tried to benefit from possible abnormal returns as well as from the diversification of portfolio risk. The general reforms in the ASE from the late 80's and early 90's, that is capital market liberalization, automated trading system and a relative political stability (Chortareas et al., 2000) made the ASE a place of interest, so as to compare its evolution with that of other emerging or even developed markets. Although these markets are becoming the centre of several studies, they encounter problems that have to do mostly with data availability. This obstacle can lead to biased statistical results that cannot be easily overcome. Several studies have been conducted in the ASE using different methodologies depending on the goal of each study, focusing mostly on the behavior of stocks, the efficiency of the market and the reaction to announcements or events (Karanikas, 2000; Niarchos and Alexakis, 2000). However, almost none of these studies have combined in such a way a selected number of macroeconomic and financial data with specific econometric models in order to come to some robust inferences regarding the behavior of stock returns in Greece. Specifically, in the present study, we tried to combine different sets of financial as well as macroeconomic variables, based on economic theory and data availability. Although, there are studies that have used similar variables for different time periods, such as the inflation rate (Niarchos and Alexakis, 2000), in our study we have added variables which are not so usually employed in asset pricing studies, that is the retail sales index, and examined their possible long-run relationships with other variables. After we have completed the cointegration analysis we proceeded to a combination between cointegration and regression analysis, which is a procedure that is not usually visible in empirical studies (Maysami et al., 2004) for any stock market, although it is a relatively easy procedure and can give very interesting results regarding the direction of these relationships between the variables. We should also mention that, in case some indices were unavailable for the whole period (1989-2006) under investigation, e.g. the industrial production index, the study is divided in specific sub-periods that could lead to interesting results without the need to subtract any variable from the analysis. Moreover, there is a need nowadays to understand how many different economic factors work in order to understand their influence on securities. In this case the investors will be even more prepared to face new challenges while investing in specific securities, even in extreme cases, such as economic crises. …