IMPACT OF MACROECONOMIC VARIABLES ON STOCK MARKET PERFORMANCE: EVIDENCE FROM DHAKA STOCK EXCHANGE

Abstract

Understanding the effect of overall macroeconomic variables on stock prices is fundamental to the development of proper financial markets. This study looks into the interrelationship between major macroeconomic variables and stock market performance and attempts to corroborate empirical evidence from developed and developing markets by collecting data on five relevant macroeconomic factors from Bangladesh and performance data from Dhaka Stock Exchange (DSE) – Bangladesh’s primary stock market, for the period of July 2010 to December 2021. The overarching hypothesis was that in a reasonably mature stock market operating in a fast-growing economy, inflation rate, foreign exchange rate, broad money supply, foreign currency reserves, and medium-term government bond rates will have a quantifiably significant impact on stock market movements and can be modelled for better understanding and future market predictions. Accounting for normality and stationarity patterns, Autoregressive Distributed Lag Model (ARDL) was found as a reasonably good fit for the data observed. DSE stock returns were found to be negatively significantly affected by inflation rate and broad money supply (M2), while positively significantly impacted by foreign currency reserves. Subsequently, Vector Auto Regression (VAR) showed that these variables have no long-term effect on stock performance, which was confirmed by the Granger Causality Test as well. The findings are consistent with similar studies in developed and developing markets worldwide.