Impact of Macroeconomic Variables on Stock Market Price Levels: Evidence from the Philippines

Abstract

The study investigates the short and long-run relationship between the Philippine Stock Exchange Index and macroeconomic variables interest rate, foreign direct investment (FDI), and exchange rate. Specifically, the paper analyzed annual secondary data from the inception of PSEi in 1985 to 2019. This study's theoretical and empirical research finds diverse perspectives on how each macroeconomic variable factors into the stock market price levels. The Philippine stock market has also grown remarkably during the past few decades. However, there is little to no comparable study in Philippine literature. So, by employing the ARDL bounds testing approach, the research adds to the body of literature by examining the macroeconomic factors influencing the growth of the Philippine stock market. The study adopted the Autoregressive Distributed Lag (ARDL) model to estimate the causality function, F-Bounds Test to establish long-run causal significance, and Error Correction Term (ECT) to determine how long until the adjustment of short-run errors to re-equilibrate to the long-run equilibrium. The results show that FDI has a positive cointegration in both the short and long run, the exchange rate has a positive cointegration both in the short and long run, and the lag of interest rate is positively significant in the short run and negatively significant in the long run.