Abstract
The ability of the stock market to reflect real economic activities through fundamental macroeconomic variables in emerging markets remains paramount considering the role of stock markets in the financial system. This paper explores the long-term equilibrium relationship between the Botswana stock market price and selected domestic and global macroeconomic variables using quarterly data for the period 1998 to 2012. The selected macroeconomic variables included Gross Domestic Product (GDP), long and short-term interest rates, money supply, foreign reserves, inflation, diamond price index, exchange rate, US share price index and 10 Year US government bond yield. The paper employs VECM framework following Johansen’s cointegration technique. The analysis revealed that macroeconomic variables and the stock market price are cointegrated, hence, a long-run equilibrium relationship existed between them. The results showed that in the long run, real GDP, short-term interest rates, inflation and diamond index are positively related with stock market price. However, long-term real interest rate, money supply, foreign reserves, exchange rate, US share price index and US government bond yield are negatively related with stock market price in the long run.
Highlights
The modern financial theory has shed some light in explaining the sensitivity of stock price movements relative to the changes in fundamental macro-economic forces
It agrees with economic theory that rise in interest rates will increase the risk free nominal interest rate and discount rate reducing the stock price (Abdullah and Hayworth, 1993)
This paper explored the relationship between the stock market price and selected macroeconomic variables in the Botswana stock market using quarterly data for the period 1998 to 2012
Summary
The modern financial theory has shed some light in explaining the sensitivity of stock price movements relative to the changes in fundamental macro-economic forces. A number of APT theory based empirical studies by the likes of Fama (1981,1990), Fama and French (1989), Black et al (1972) collectively conceded that there exists a significant relationship between stock market prices and macroeconomic variables such as inflation, production index, yield curve, interest rates and risk premium Another alternative approach was developed by Chen et al (1986) which use the Present Value Model (PVM) or discounted cash flow approach to investigate the impact of systematic risk factors on returns through all macroeconomic factors influencing future expected cash flows and future discount rates. If stock prices are a reflection of the underlying fundamentals given all the available information, it would be rational to say that they are a perfect indicator of future economic activities and their causal relations with other economic variables could be used to guide policy makers and investors
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
