Determinants of Equity Prices in the Stock Markets

Abstract

Brav & Heaton (2003) alleges market indeterminacy (a situation where it is impossible to determine whether an asset is efficiently or inefficiently priced) in the stock market. Kang (2008) argue that empirical tests of linear asset pricing models show presence of mispricing in asset pricing. Asset pricing is considered efficient if the asset price reflects all available market information to the extent no informed trader can outperform the market and/or the uninformed trader. This study examined the extent to which some information factors or market indices affect the stock price. A model defined by Al-Tamimi (2007) was used to regress the variables (stock prices, earnings per share, gross domestic product, lending interest rate and foreign exchange rate) after testing for multicollinarity among the independent variables. The multicollinarity test revealed very strong correlation between gross domestic product and crude oil price, gross domestic product and foreign exchange rate, lending interest rate and inflation rate. All the variables have positive correlation to stock prices with the exception of lending interest rate and foreign exchange rate. The outcomes of the study agree with earlier studies by Udegbunam and Eriki (2001); Ibrahim (2003) and Chaudhuri and Smiles (2004). This study has enriched the existing literature while it would help policy makers who are interested in deploying instruments of monetary policy and other economic indices for the growth of the capital market.