Evaluating the Effectiveness of Macroeconomic Determinants on the Performance of the Dhaka Stock Exchange: A Time Series Approach

Abstract

The present study examines the causal relationships between selected macroeconomic factors and the Dhaka Stock Exchange Broad Index (DSEX) performance from January 2014 to December 2023. Time series econometric techniques include Dickey-Fuller (ADF) and Phillips-Perron (PP) tests to verify stationarity, Granger causality to investigate short-term dynamics, and Johansen's co-integration test to evaluate long-term relationships. The results show that while there is no long-term cointegration, there are significant short-term relationships between macroeconomic variables and the DSEX broad index. GDP growth and unemployment significantly impact stock performance, with two-way causality. While interest rates and the money supply have little impact on the index, inflation forecasts trends in inflation even if it doesn't directly influence it. Overall, the DSEX broad index shows how important it is to Bangladesh's macroeconomic dynamics by accurately predicting changes in GDP growth, unemployment, and inflation. The researcher provides unique insights into the mechanics of the Bangladeshi stock market, filling a vacuum in the literature on emerging countries. It analyzes how macroeconomic conditions affect the DSEX index over time, including the COVID-19 pandemic. The study investigates the influence of several macroeconomic variables on DSEX Index performance, providing significant information for Bangladeshi investors and policymakers looking to increase profits, inform policy choices, and promote economic stability. To have a better knowledge of stock market dynamics, future studies should include other macroeconomic aspects and regional markets.