Selected Macroeconomic Variables and Stock Market Movements: Empirical evidence from Thailand

Joseph Ato Forson,Jakkaphong Janrattanagul

doi:10.5709/ce.1897-9254.138

Joseph Ato Forson, Jakkaphong Janrattanagul

Open Access

https://doi.org/10.5709/ce.1897-9254.138

Copy DOI

Abstract

This paper investigates and analyzes the long-run equilibrium relationship between the Thai stock Exchange Index (SETI) and selected macroeconomic variables using monthly time series data that cover a 20-year period from January 1990 to December 2009. The following macroeconomic variables are included in our analysis: money supply (MS), the consumer price index (CPI), interest rate (IR) and the industrial production index (IP) (as a proxy for GDP). Our findings prove that the SET Index and the selected macroeconomic variables are cointegrated at I (1) and have a significant equilibrium relationship over the long run. Money supply demonstrates a strong positive relationship with the SET Index over the long run, whereas the industrial production index and consumer price index show negative long-run relationships with the SET Index. Furthermore, in non-equilibrium situations, the error correction mechanism suggests that the consumer price index, industrial production index and money supply each contribute in some way to restore equilibrium.In addition, using Toda and Yamamoto’s augmented Granger causality test,we identify a bi-causal relationship between industrial production and money supply and unilateral causal relationships between CPI and IR, IP and CPI, MS and CPI, and IP and SETI, indicating that all of these variables are sensitive to Thai stock market movements. The policy implications of these findings are also discussed.

Highlights

The relationships between macroeconomic variables and stock market movements have been the focus of financial and economic literature for many years
4.2 Cointegration Results The cointegration test was conducted for Thai stock market movements and the four selected macroeconomic variables
We can reject the null hypothesis and accept the alternative hypothesis for money supply, inflation rate, and the industrial production index (IP), which implies that these three variables form a cointegration relationship with Thai stock market movements

Summary

Introduction

The relationships between macroeconomic variables and stock market movements have been the focus of financial and economic literature for many years. The relationships between macroeconomic variables and stock market movements have been studied extensively, especially in advanced and emerging economies. Ross (1976) introduced the Arbitrage Pricing Theory (APT), which states that multiple risk factors can be used to explain the returns on a financial asset. Chen, Roll and Ross (1986) further analyzed the APT and linked a linear function of various macroeconomic factors to the returns on financial assets. The seminal contributions of Chen et al, (1986) to the APT literature provided a framework for further analysis of the relationship between stock market movements and macroeconomic variables. Many empirical studies are based on the APT model

Objectives

Results

Conclusion