Macroeconomic determinants of aggregate stock prices evidence from developed and emerging countries
Creators: name: Alnemer, Mohammed
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350203
subject: Financial econometrics

description: Financial indicators, such as profits per share or dividend payout ratios, are commonly used to analyse and explain stock values. However, changes in economic conditions may have an impact on demand, hence impacting profitability and payments of firms, which in turn influence stock prices. The impact of macroeconomic variables on stock prices has been studied for decades as one of several factors that affect investor returns. When lagged macroeconomic indicators exert influence on stock prices, it potentially indicates market inefficiencies. In other words, individual investors might generate anomalous profits by capitalising on historical macroeconomic data, which undermines the market's ability to efficiently allocate scarce resources. 

Despite the well-established relation between macroeconomic variables and stock documented across extensive literature for the past two decades, especially in developed economies and to a lesser extent in emerging economies, there is a lack of studies that compare across different contexts of economies. Emerging stock markets distinguish themselves from developed economics in many ways, including market efficiency, political systems, currency fluctuation, and weak institutional infrastructure. Consequently, this thesis aims to investigate the relation between stock prices and macroeconomic variables, including real economic activity, inflation, interest rates, money supply, exchange rates, and oil prices, in both developed and emerging markets from January 2010 to December 2018.

Comprehensive econometric procedures are used in this study in two phases of analysis, including bivariate and multivariable analysis, to investigate the relation between stock prices and macroeconomic variables for eight countries, including four OECD developed countries (Canada, Japan, Germany, and the United Kingdom) and three BRICS  countries (Brazil, Russia, and India), as well as Saudi Arabia, which is a high-income emerging economy. The bivariate analysis, utilising Engle-Granger's approach of cointegration and causality test, provides insight into the relations between the selected macroeconomic variables and stock prices. It demonstrates that certain macroeconomic variables have varying degrees of explanatory power for stock prices and that some might act jointly with other variables (e.g., inflation, interest rates, and money supply). 

These results are further strengthened when the analysis is extended to multivariable settings (the second phase of analysis, using the Autoregressive Distributed Lag ARDL approach of cointegration) to examine the relation between stock prices and macroeconomic variables (collectively) to control certain variables that may act through others. The results of multivariable analysis indicate that macroeconomic variables, such as interest rates, exchange rates, and economic activity, similarly influence stock prices in developed and emerging economies, while macroeconomic variables such as inflation (as measured by the Consumer Price Index CPI) and oil prices influence stock prices in emerging economies in a different way compared to developed economies. 

The inflation variable demonstrates a positive relation with stock prices in developed economy countries included in the sample, confirming the widely held belief that stocks are an inflation hedge investment. However, this is not the case in emerging economies, where a negative relation is reported between inflation and stock prices for these economies, implying that investors may consider inflation as a sign of economic overheating and sell their stocks in favour of less risky assets. For the oil price variable and its relation with stock prices, the expected theoretical relations (negative relation for oil-importing countries, and positive relation for oil-exporting countries) are found in developed economies but not in emerging ones. These findings imply that the effect of oil does not depend only on whether countries are oil importers or exporters, but also on the institutional structure of the economy.