Abstract
This paper tries to investigate the long-run relationship and the short-run dynamics between Bangladesh stock market index (DSE General Index) and some selected macroeconomic variables such as Broad money supply (M2) and Deposit Interest rate (DIR). This study analyses monthly data for the above variables between the periods spanning from January 2009 to June 2015 and employ different econometric tools. The Johansen multivariate co-integration tests indicate that the Bangladesh stock market index (DSE General Index) and chosen two macroeconomic variables are co-integrated, this is indicative of a long-run relationship. It shows the speed of adjustment of any disequilibrium towards long run equilibrium state. The speed of adjustment is 10.7816 percent. Cointegration analysis, along with the VECM, suggests that deposit interest rate is negatively related to stock prices, and money supply (M2) is positively related to stock prices in the long-run. This study also finds short-run causal relationship. It is found that only Deposit Interest Rate has short run influence on DSE General Index. R-squared of the VECM is 0.291900 that is 29.1900 percent. It means that all of the independent variables can explain 29.1900 percent of the total variations of the dependent variable. The residuals of the regression model have serial correlation, but they are homoscedastic and normally distributed.
Highlights
A number of factors ranging from economic, political and Socio-cultural behavior of any country have a great impact on the stock market of that country
Y = Dhaka Stock Exchange (DSE) General Index (DGEN) α = Intercept of Y which is constant β1 and β2 = Beta coefficients of X1 and X2 respectively X1 = deposit interest rate (DIR) X2 = money supply (M2) u= error term Monthly data are obtained from official website of Bangladesh bank and the period covered is from January 2009 to June 2015 [28]
The macroeconomic forces were represented by deposit interest rates and money supply (M2) while the DSE General Index was used to represent changes in the Dhaka stock market prices
Summary
A number of factors ranging from economic, political and Socio-cultural behavior of any country have a great impact on the stock market of that country. A number of factors occurring within or without the economic system have impact on the stock prices of the Dhaka Stock Exchange (DSE) and it reacts either positively or negatively. Two intense financial crises were observed during that period. It is needed to analyze the impact of macroeconomic variables such as money supply, and deposit interest rate on the movement of DSE general index (DGEN). In this research two macroeconomic variables: Money Supply (M2), Deposit Interest Rate (DIR) and on the other hand DSE General Index are considered to understand whether the movement of stock prices of the Dhaka Stock Exchange (DSE) is subject to some macroeconomic variables change. Deposit interest rate is assumed to have negative relationship with share price and Broad money supply (M2) has positive influence over share prices
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