FULLTEXT02

JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL
JÖNKÖPING UNIVERSITY
Impact of Macroeconomic Variables on the Stock Market Prices of the

Stockholm Stock Exchange (OMXS30)
Master´s Thesis within International Financial Analysis
Author: Joseph Tagne Talla
Tutors: Per-Olof Bjuggren, Louise Nordström

Jönköping May 2013
Acknowledgments
I would like to thank my supervisors Professor Per-Olof Bjuggren and Louise Nordström for their
invaluable contributions.
Jönköping, May 2013
2
Master´s thesis in International Financial Analysis
Title: Impact of Macroeconomic Variables on the Stock Market Prices of the Stockholm
Stock Exchange
Author: Joseph Tagne Talla
Tutors: Per-Olof Bjuggren, Louise Nordström
Date: 2013-05-17
Abstract
The key objective of the present study is to investigate the impact of changes in selected
macroeconomic variables on stock prices of the Stockholm Stock Exchange (OMXS30). To
estimate the relationship, unit root test, Multivariate Regression Model computed on Standard
Ordinary Linear Square (OLS) method and Granger causality test have been used. The time
period examined is 1993-2012 and all the tests are conducted based on monthly data. Based on
estimated regression coefficients and t-statistics, it is found that inflation and currency
depreciation have a significant negative influence on stock prices. In addition, interest rate is
negatively related to stock price change, but it is not significant in the model. On the other hand,
money supply is positively associated to stock prices although not significant. No unidirectional
Granger Causality is found between stock prices and all the predictor variables under study
except one unidirectional causal relation from stock prices to inflation.
Keywords: Macroeconomics variables, stock prices, OLS, Granger Causality test.
3
Abbreviations
ADF……………………………… Augmented Dickey-Fuller
APT……………………………… Asset Pricing Theory
CAPM…………………………… Capital Asset Pricing Model
OMXS30……………………........ OMX Stockholm 30
OLS……………………………… Ordinary Least Square
4
Table of Contents
1 Introduction ..............................................................Erreur ! Signet non défini.7
1.1 Limitations .................................................................................................................................... 7
1.2 Outline ........................................................................................................................................... 8
2 Theoretical Framework ..................................................................................... 9

2.1 The Efficient Market Hypothesis .................................................................................................. 9
2.2 The Arbitrage Pricing Theory. .................................................................................................... 10
3 Literature Review ............................................................................................ 12

4 Data and Methodology .................................................................................... 17
4.1 Variables description and Expectation ........................................................................................ 17
4.2 Data ............................................................................................................................................. 19
4.3 Methodology ............................................................................................................................... 20
5 Empirical Results ............................................................................................. 22

5.1 Unit Root Test ............................................................................................................................. 22
5.2 Regression Output (OLS) ............................................................................................................ 24
5.3 Residuals diagnostics .................................................................................................................. 26
5.3.1 Correlogram for the Residuals............................................................................................. 26
5.3.2 Serial Correlation LM Test .................................................................................................. 27
5.3.3 Heteroscedasticity Test........................................................................................................ 28
5.3.4 Normality Test ..................................................................................................................... 28
5.3.5 Granger Causality Test ........................................................................................................ 29
6 Discussion and Conclusion .............................................................................. 31

6.1 Further Research.......................................................................................................................... 31
7 References ......................................................................................................... 33
8 Appendix ........................................................................................................... 37
8.1 Appendix 1: ADF Test ................................................................................................................ 37
8.1.1 Stock Price (OMXS30) ....................................................................................................... 37
8.1.2 Consumer Price Index (CPI) ............................................................................................... 39
8.1.3 Money Supply (MS) ............................................................................................................ 41
8.1.4 Interest Rate (IR) ................................................................................................................. 44
8.1.5 Exchange Rate ..................................................................................................................... 46
5
8.2 Appendix 2: Eviews output Ordinary Linear Square Test .......................................................... 47
8.3 Appendix 3: Eviews output Granger Causality Tests.................................................................. 48
6
1 Introduction
A stock exchange market is the center of a network of transactions where buyers and sellers of
securities meet at a specified price. Stock market plays a key role in the mobilization of capital in
emerging and developed countries, leading to the growth of industry and commerce of the
country, as a consequence of liberalized and globalized policies adopted by most emerging and
developed government. Many factors can be a signal to stock market participants to expect a
higher or lower return when investing in stock and one of these factors are macroeconomic
variables. The change in macroeconomic variables can significantly impact stock price return.
The results of this empirical research help the reader to understand whether the movement of
stock prices of the Stockholm Stock Exchange (OMXS30) is subject to some macroeconomic
variables change. Investors will find this study as a helpful tool for them to identify some basic
economic variables that they should focus on while investing in stock market and will have an
advantage to make their own suitable investment decisions.
The present research considers four macroeconomic variables: Consumer Price Index (CPI) as
proxy for inflation rate, Exchange Rate (ER), Money Supply (MS), Interest Rate (IR) and on the
other hand Stockholm Stock Exchange indices in the form of OMXS30. In the study we use the
Ordinary Least Squared (OLS) to test the impact of macroeconomic variables on Stockholm
Stock Exchange Indices and vice versa (using the Granger causality test), based on monthly data
from January, 1993 to December, 2012. Besides, Augmented Dickey-Fuller (ADF) test to check
the stationarity of the data and diagnostic checking to check if residuals from the regression are
white noise.
The objective of this paper is to investigate the impact of macroeconomic variables on the stock
market prices of the Stockholm stock exchange during the period 1993-2012. This paper is a
complement to the existing literature. To our knowledge, the present research is the most recent
one that focuses on the Swedish stock market.
1.1 Limitations
Another three important macroeconomic variables that are commonly used in research to explain
changes in stock prices have been excluded from the present paper namely: Industrial Production,
7
Foreign Exchange Reserves and Oil Prices variables. The exclusion of the Industrial Production
and Oil Price variables was due to the lack of consistent data for the study period. However, the
Foreign Exchange Reserves variable was negative and insignificant when included in the
regression model and there was not previous research to attest to this finding of negative
relationship between foreign exchange reserves and stock prices. Besides, this result can be
explained by the fact that Sweden has a fluctuating exchange regime. Based on that, foreign
exchange reserves variable was excluded from the model and its exclusion did not affect the
regression and the residual diagnostic testing results.
1.2 Outline
The thesis is organized as follows. Section 2 reviews the theoretical framework with respect to
both efficient market hypothesis and arbitrage pricing theory. Section 3 provides a literature
review and gives support to the variables considered in this research. Section 4 describes the data
and methodology used in the research. Section 5 focuses on the empirical results and discussions
of ADF test, regression analysis, diagnostic checking and Granger causality test. Section 6
provides a discussion as well as suggestions for further research and concludes this research.
8
2 Theoretical Framework
Different theoretical frameworks have been employed by many researchers to link changes in
macroeconomic variables with stock market returns. These include the semi strong efficient
market hypothesis developed by Fama (1970) and the Arbitrage Pricing Theory (APT) developed
by Ross (1976). These theories are discussed in this section as they relate the macroeconomic
variables to stock market return.
2.1 The Efficient Market Hypothesis
Popularly known as random walk theory, the efficiency market hypothesis assumes that market
prices should incorporate all available information at any point in time. The term “efficient
market” was first used by Eugene Fama (1970) who said that: “in an efficient market, on the
average, competition will cause the full effects of new information on intrinsic values to be
reflected instantaneously in actual prices”. Fama defined an efficient market as “a market where
prices always reflect all available information”. Indeed, profiting from predicted price
movements is unlikely and very difficult as the efficient market hypothesis suggests that the main
factor behind price changes is the arrival of new information.
However, there are different kinds of information that affect security values. Consequently, the
efficient market hypothesis is stated in three variations namely: the weak form hypothesis, semi
strong form hypothesis and the strong form hypothesis depending on what the term “available
information” means.
This paper focuses on the semi strong hypothesis since it is the most convenient for our study. As
a matter of fact, the semi strong hypothesis states that all publicly available information is already
incorporated into current prices; that is the asset prices reflect all available public information.
Indeed, the semi strong hypothesis is used to investigate the positive or negative relationship
between stock return and macroeconomic variables since it postulates that economic factors are
fully reflected in the price of stocks. Public information can also include data reported in a
company´s financial statement, the financial situation of company´s competitors, for the analysis
of pharmaceutical companies. Hence, information is public and there is no way to make profit
using information that everybody else knows. So the existence of market analysts is required to
be able to understand the implication of vast financial information as well as to comprehend
processes in product and input market.
9
2.2 The Arbitrage Pricing Theory.
Developed by Ross (1976), the Arbitrage Pricing Theory (ATP) is another way of linking
macroeconomic variables to stock market return. It is an extension of the Capital Asset Pricing
Model (CAPM) which is based on the mean variance framework by the assumption of the
process generating security. In other words, CAPM is based on one factor meaning that there is
only one independent variable which is the risk premium of the market. There are similar
assumptions between CAPM and APT namely: the assumption of homogenous expectations,
perfectly competitive markets and frictionless capital markets.
However, Ross (1976) proposes a multifactor approach to explaining asset pricing through the
arbitrage pricing theory (APT). According to him, the primary influences on stock returns are
some economic forces such as (1) unanticipated shifts in risk premiums; (2) changes in the
expected level of industrial production; (3) unanticipated inflation and (4) unanticipated
movements in the shape of the term structure of interest rate. These factors are denoted with
factor specific coefficients that measure the sensitivity of the assets to each factor. APT is a
different approach to determining asset prices and it derives its basis from the law of one price.
As a matter of fact, in an efficient market, two items that are the same cannot sell at different
prices; otherwise an arbitrage opportunity would exits. APT requires that the returns on any stock
should be linearly related to a set of indexes as shown in the following equation:
(1)
Where
= the expected level of return for stock i if all indices have a value of zero
= the value of the jth index that impacts the return on stock i
= the sensitivity of stock i´s return to the jth index
= a random error term with mean equals to zero and variance equal to
According to Chen and Ross (1986), individual stock depends on anticipated and unanticipated
factors. They believe that most of the return realized by investors is the result of unanticipated
events and these factors are related to the overall economic conditions. In fact, although asset
returns can also be affected by influences that are not systematic to the economy, returns on large
10
portfolios are mainly influenced by systematic risk because idiosyncratic returns on individual
assets are cancelled out through the process of diversification.
11
3 Literature Review
Founded in 1863, Stockholm Stock Exchange is the main securities market in Sweden. After
merging with OMX in 1998, Stockholm Stock Exchange is held today by the Nordic division of
the largest exchange holding company in the world, namely NASDAQ OMX. An overview of
Stockholm Stock Price Index is represented on figure 1 from 1993 to 2012 (monthly
representation). The measure of predictability and efficiency of stock returns has always been an
interesting topic for researchers, investors and government agencies.
Figure 1: Stockholm stock Price Index (1993-2012)
1992-01-31 2012-12-31 M OMX STOCKHOLM 30 (OMXS30) - PRICE INDEX

1,600
1,400
1,200
1,000
800
600
400
200
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Several researchers have centered their empirical studies on the relationship between stock
market movement and macroeconomic variables and this has been intensively examined in both
emerging and developed capital markets. Homa and Jaffe (1971), Hamburger and Kochin (1972)
find a positive relationship between money supply and stock prices. This result follows the ideas
of real activity economists who argue that if there is an increase in money supply; it means that
money demand is increasing which is a signal of an increase in economic activity. This increase
in economic activity implies higher cash flows, which causes stock prices to rise (Sellin, 2001).
Grossman and Shiller (1980) examine how historical movements can be justified by new
information. Using historical data from 1890-1979, they show evidence that stock price
movement can be attributed to real interest rate movement.
12
Another study is that of Chen, Roll and Ross (1986) who investigate the impact of
macroeconomic variables on stock prices. They employ seven macroeconomic variables to test
the multifactor model in the USA. They find that consumption market index and oil prices are not
related to financial market while industrial production, change in risk premium and twist in the
yield curve are significantly related to stock returns.
Gjerde and Saettem (1999) study the relation between stock returns and macroeconomic variables
in Norway. Their results show a positive relationship between oil price and stock returns as well
as real economic activity and stock returns. However, their study fails to show a significant
relation between stock returns and inflation.
Bhattacharya et. al. (2001) analyze the causal relationship between the stock Market and three
macroeconomic variables in India`s case using the Granger non-causality. These macroeconomic
variables are: exchange rate, foreign exchange reserves and trade balance. The results suggest
that there is no causal linkage between stock prices and the three variables under consideration.
In their study based on six Asian countries, Doong et al (2005) investigate the relationship
between stocks and exchange rates using the Granger causality test. According to their results,
there is a significantly negative relation between the stock returns and change in the exchange
rates for all the included countries except one.
Uddin and Alam (2007) examine the linear relationship between share price and interest rate as
well as share price and changes of interest rate. In addition, the also explore the association
between changes of share price and interest rate and lastly changes of share price and changes of
interest rate in Bangladesh. They find for all of the cases that Interest Rate has significant
negative relationship with Share Price and Changes of Interest Rate has significant negative
relationship with Changes of Share Price.
Geetha, Mohidin, Chandran and Chong (2011) investigate the relationship between stock market,
expected inflation rate, unexpected inflation rate, exchange rate, interest rate and GDP in the case
of Malaysia, US and China. They use cointegration test to determine the number of cointegrating
vectors, which shows the long-run relationship between the variables while the short-run
relationship was determined using the Vector Error Correction model. Their results indicate that
there is a long run cointegration relationship between stock markets and those variables in
13
Malaysia, US and China. On the other hand, there is no short run relationship between the stock
market, unexpected inflation, expected inflation, interest rate, exchange rate and GDP for
Malaysia and US using VEC. However, China’s VEC result shows that there is a short-run
relationship between expected inflation rates and China’s stock market.
Gay (2008) investigates the relationship between stock market index price and and the
macroeconomic variables of exchange rate and oil price for emerging countries (Brazil, Russia,
India, and China) using the Box-Jenkins ARIMA model. He finds no significant relationship
between respective exchange rate and oil price on the stock market index prices in any of the
emerging countries. He concludes that this result suggests that the markets of Brazil, Russia,
India, and China exhibit the weak-form of market efficiency.
Mohammad (2011) uses Multivariate Regression Model computed on Standard OLS formula and
Granger causality test to model the impact of changes in selected microeconomic and
macroeconomic variables on stock returns in Bangladesh. He examines monthly data for all the
variables under study covering the period from July 2002 to December 2009. The study finds a
negative relationship between stock returns and inflation as well as foreign remittance while
market Price/Earnings and growth in market capitalization have a positive influence on stock
returns. However, no unidirectional Granger Causality is found between stock returns and any of
the independent variables and the lack of Granger Causality reveals the evidence of an informally
inefficient market.
Mahedi (2012) examines the long-run relationship and the short-run dynamics among
macroeconomic variables and the stock returns of Germany and the United Kingdom. He uses the
Johansen Co-integration test to indicate the co-integrating relationship between the stock prices
and macroeconomic determinants. And then, he uses error-correction models to investigate both
the short-and long-term casual relationships and each case is examined individually. For
Germany case, the results show that the short-run causality runs from stock returns to inflation,
from money supply to stock returns and from industrial production to stock returns. The long-run
causality runs from inflation to stock returns and from exchange rate to stock returns. There is
only one short-and long-run relationship, that is from the stock returns to industrial production.
For the United Kingdom case, he finds that the short run causality run from stock returns to T-
bill, from stock returns to money supply, from stock returns to exchange rate, exchange rate to
14
stock returns and stock returns to industrial production. The long run causality runs from inflation
to stock returns. The short and long-run causal relationship runs from stock returns to inflation,
from money supply to stock returns and from industrial production to stock returns. These results
indicate the existence of short-run interactions and long term causal relationship between both
Germany and the UK stock markets and the macroeconomic fundamentals.
Ray Sarbapriya (2012) uses a simple linear regression model and Granger causality test to
measure the relationship between foreign exchange reserves and stock market capitalization in
India. The results show that causality is unidirectional and it runs from foreign exchange reserve
to stock market capitalization and that foreign exchange reserves have a positive impact on stock
market capitalization in India.
Many other early studies of Lintner (1973), Jaffe and Mandelker (1977) and Fama and Schwert
(1977) examine the relationship between inflation and stock prices. Most of these studies test the
Fisher hypothesis which predicts a positive relationship between expected nominal returns and
expected inflation and their findings are inconsistent with the Fisher hypothesis. They all report a
negative linkage between stock returns and inflation. However, Firth (1979) observes a positive
relationship between nominal stock returns and inflation when studying the relationship between
stock market returns and rates of inflation in the United Kingdom.
Table 1: Impact of macroeconomic variables on stock market

Macroeconomic Positive Negative Insignificant
variables
Inflation Firth (1979) Lintner (1973) Gjerde and
Fama and Schwert Saettem (1999)
(1977)
Mandelker (1977) Chen, Roll and
Geetha, Mohidin, Ross (1986)
Chandran and
Chong (2011)
Interest rate Uddin and Alam
(2007)
Geetha, Mohidin,
Chandran and
Chong (2011)
Exchange rate Geetha, Mohidin, Bhattacharya et.
Chandran and al.(2001)
Chong (2011)
Doong et al (2005) Robert D. Gay
(2008)
15
Money Supply Homa and Jaffe Mahedi (2012)
(1971)
Hamburger and
Kochin (1972)
Oil price Gjerde and Saettem Chen, Roll and
Ross (1986)
(1999)
Robert D. Gay
(2008)
Foreign exchange Ray Sarbapriya Bhattacharya et.
reserves (2012)
al.(2001)
Industrial production Mahedi (2012)
Chen, Roll and Ross
(1986)
16
4 Data and Methodology
4.1 Variables description and Expectation
Dependent variable; OMX Stockholm 30 (OMXS30)

The OMX Stockholm 30 is a stock market index for the Stockholm Stock Exchange. It is the
market value weighted index of the 30 stocks that have the largest trading volume on the
Stockholm Stock Exchange.
Consumer Price Index (CPI)
Consumer price index is used as a proxy for inflation. The relationship between inflation and
stock returns can be positive or negative depending on whether the economy is facing unexpected
or expected inflation. Expected inflation happens when demand exceeds supply, causing an
increase in prices to stimulate more supply. Since this is expected by the firms, increase in prices
would also increase their earnings which would lead to them paying more dividends and hence
increase the price of their stocks as well. On the other hand when inflation is unexpected, an
increase in price will lead to the increase in cost of living and this will shift resources from
investment to consumption. Indeed, as inflation increases, nominal interest rates will also
increase. The discount rate used to determine intrinsic values of stocks will therefore increase,
and thus this will reduce the present value of net income leading to lower stock prices. Moreover,
if the price elasticity of demand for the firm´s products is high, a rise in inflation may cause a
decline in a firm’s sales and net income, and thus its stock price.
This negative relationship between unexpected inflation and stock prices is hypothesized by
Fama (1981) as a function of the relationship between unexpected inflation and real activity in
the economy. This research is based on APT, which is built on the relationship between the
unexpected changes in economy and stock returns, thus inflation is expected to be negatively
associated to stock prices.
Interest Rate (IR)
The money market rate is considered as a proxy for interest rate. The money market is a segment
of the financial market in which financial instruments with high liquidity and very short
maturities are traded. The money market is used by participants as a means of borrowing and
17
lending in the short term, from several days to just under a year. An increase in the interest rate
will result in falling stock prices due to the fact that high interest rate will increase the
opportunity cost of holding money, causing substitution of stocks for interest bearing securities.
Interest rate is one of the important macroeconomic variables and is directly related to economic
growth. From the point of view of a borrower, interest rate is the cost of borrowing money while
from a lender’s point of view, interest rate is the gain from lending money. The interest rate is
expected to be negatively associated to stock returns.
Exchange Rate (ER)
The next macroeconomic variable used in this study is the exchange rate which in this case is the
bilateral nominal rate of exchange of the Swedish krona (SEK) against one unit of a foreign
currency, Euro (€). The reason is that Eurozone countries are the main market for Swedish
foreign trade. An increase in exchange rate (depreciation) will cause a decline in stock prices
because of expectations of inflation. Moreover, heavy importer companies will suffer from higher
costs due to a weaker domestic currency and will have lower earnings, and lower share prices. As
a result, the stock market, which is a collection of a variety of companies, trends to react
negatively to currency depreciation. However, domestic exporters benefit from currency
depreciation because it causes domestic products to become cheaper to foreign clients. So on
macroeconomic level, currency depreciation will boost the domestic export industry and depress
the import industry. Overall, the effect of exchange rate on stock prices can be either a positive or
a negative relationship. Based on Doong et al (2005) work, we assume the negative relationship
is predominant.
Money Supply (MS)
The form of money supply called M0 is defined as the non-bank sectors holdings of notes and
coins. It is calculated by subtracting the notes and coins held by banks from the total quantity of
Riksbank notes and coins in circulation. An increase in the money supply is frequently assumed
to positively affect stock prices. When money stock grows, it stimulates the economy which leads
to greater credit being available to firms to expand production and then increases sale resulting in
increased earnings for firms. This results in better dividend payments for firms leading to an
increase in the price of stocks. However, money supply can also be negatively associated to stock
prices. To illustrate this argument, we first go through the link between money supply and
18
inflation, since the expansion of the money supply is positively related to inflation in the
economy which would increase the nominal risk free rate (Fama, 1981). This increase in the
nominal risk free rate will lead to a rise in the discount rate which leads to a fall in return. A
positive relationship between money supply and stock price is expected in this study.
Table 2: Regression Variables

Variables Explanations Data source and Expected sign of
Period coefficient
Dependent variable
OMXS30 The OMX Nasdaq OMX, Jan Na
Stockholm 30 is a 1993 - Dec 2012,
stock market index monthly.
for the Stockholm
Stock Exchange, in
Swedish Krona.
Independent variables
CPI The Consumer Price Statistics Sweden -
Index (CPI) is the (SCB), Jan 1993 -
most common Dec 2012, monthly.
measure of inflation.
Index ranges from 0
to 100 with high
rating means high
inflation.
IR Money market rate International -
as a proxy to interest Financial Statistics
rate. Monthly (IMF), Jan 1993 -
average of daily rates Dec 2012, monthly.
for day-to-day
interbank loans (%)
ER Exchange rate, WM/Reuters, Jan -
Swedish krona 1993 - Dec 2012,
(SEK) against one monthly.
unit of Euro (€).
MS Money supply (M0), Sveriges Riksbank, +

millions Swedish Jan 1993 - Dec 2012,
Krona. monthly.
4.2 Data
The objective of this paper is to empirically examine the impacts of some macroeconomic factors
on the stock market returns of the Stockholm stock exchange (OMXS30). In this study, stock
price index (OMXS30) is considered as the dependent variable. On the other hand, based on
19
previous studies, four macro-economic variables namely Consumer Price Index (CPI), Call
Money Rate (IR), Exchange Rate (ER) and Money Supply (MS) are used as predictor variables.
The study examines monthly data for all the variables under study covering the period from
January 1993 to December 2012 (240 monthly observations) which are collected from the
Thomson Reuters Financial Datastream.
Table 3 presents the summary of descriptive statistics for the selected dependent and independent
variables under study. 240 monthly observations of all the variables have been examined to
estimate the following statistics. The mean describes the average value in the series and Std.
Deviation measures the dispersion or spread of the series. The maximum and minimum statistics
measures upper and lower bounds of the variables under study during our chosen time span.
Table 3: Descriptive statistics for 1993-2012

Mean Minimum Maximum Std.
Deviation
LOMXS30 762,1750 174,1300 1433,080 308,3970
LCPI 275,8629 241,0000 315,4900 21,32207
LIR 3,895542 0,350000 10,90000 2,353708
LER 9,137867 8,139000 11,46000 0,519209
LMS 83 727,82 58 646,00 100 883,0 13 218,25
N 240
4.3 Methodology
Two main econometric models are conducted in this study: the Ordinary Least Squared (OLS) to
test the relationship between the macroeconomic variables and the stock price index (OMXS30),
and Granger Causality test to examine the relation between individual explanatory variables and
OMXS30 (either unidirectional, bidirectional or no relation).
However, it is important to keep in mind that time series data analysis is subject to the problem of
spurious regression if the data is non-stationary, resulting in unreliable results of the models
constructed. So to avoid spurious regression, the unit root test (Augmented Dickey –Fuller test)
will be conducted first to check if the time series data is stationary. If the test shows that the data
is non-stationary, the first difference of the variables will be employed before conducting the
20
OLS method and the Granger Causality Test. The multivariate regression is developed in the
following equation:
(2)
Firstly, all the variables under study are transformed into the logarithmic form. Then, because of
the existence of a unit root in all the variables data series (Tables 4 and 5), the first difference of
logarithm of all the variables and the second difference of the logarithm of money supply are
used.
21
5 Empirical Results
5.1 Unit Root Test
When dealing with time series data, it is important to examine the existence of unit root in the
data series. If the variable is not stationary, we can obtain a high although there is no
meaningful relation between variables. A non-stationary process generates the problem of
spurious regression between unrelated variables. Before running our linear regression and
Granger causality test, we need to test for Unit root and make sure that we are dealing with
stationary data before using it. There are numerous unit root tests and one of the most popular
among them is the Augmented Dickey-Fuller (ADF) test. Augmented Dickey -Fuller (ADF) is an
extension of Dickey -Fuller test.
The null and alternative hypotheses are as follows:
Unit root [Variable is not stationary]
No unit root [Variable is stationary]
If the coefficient is significantly different from one (less than one) then the hypothesis that y
contains a unit root is rejected. Rejection of the null hypothesis denotes stationarity in the series.
If we don´t reject the null hypothesis, we conclude we have a unit root. Before running ADF test,
we plot the variable to check if there is a trend and use the Elder and Kennedy unit root model
selection approach. OMXS30, CPI MS and IR are growing as we can see respectively from
figures 4a, 5a, 6a and 7a (Appendix 1). So the ADF test is run at level with trend and intercept as
summarized in table 4.
By looking at the results, it appears that the p-values for all the included variables in our research
are greater than the critical value (5%). So we cannot reject the null hypothesis and we must
therefore conclude that four variables out of five which are growing are non-stationary, meaning
that those variables follow a random walk with drift and no time trend. This implies that we need
to take the first difference of those variables before they can be run in the regression model
22
Table 4: ADF test result at level, trend, intercept
Null hypothesis P value Null Results
hypothesis
LOMXS30 is non- 0,4113 Do not reject LOMXS30 is non-
stationary stationary
LCPI is non- 0,0567 Do not reject LCPI is non-
stationary stationary
LMS is non- 0,9999 Do not reject LMS is non-stationary
stationary
LIR is non- 0,0989 Do not reject LIR is non-stationary
stationary
The only variable left is the ER variable which is not growing (Figure 8a, Appendix 1). So we
run the ADF test only at level, with intercept and no trend as we can see the result from table 5.
Table 5: ADF Test at level, intercept

LER is
LER 0,1356 Do not reject non-
stationary
Since the p-value (0.1356) is greater than the critical value (5%), we cannot reject the null
hypothesis and we can conclude that ER variable is following a pure random walk.
Following the results from table 4 and 5, the remedy is to take the first difference of all the
variables before using them in the regression model. Table 6 is the summary of such test. The p-
values of four out of five variables included in our regression are less than the critical value (5%).
In other words, the p-values of OMXS30, CPI, IR and EP are less than 5%, meaning that we
reject the null hypothesis. We can conclude that those variables are stationary at first difference.
It is easy to see that the trend on OMXS30, CPI and IR variables is removed when taking their
first difference as we see in their respective figures 4b, 5b, 7b (Appendix 1).
However, the p-value for MS is greater than critical level, 25, 39% 5%, we cannot reject the
null hypothesis and we conclude that MS is non-stationary at first difference and it follows a pure
random walk at first difference since it is not growing (Figure 6b, Appendix 1).
23
Table 6: ADF test at difference
Null hypothesis P-value Null Results
hypothesis
LOMXS30 is not 0,0000* Reject LOMXS30 is stationary
stationary
LCPI is not 0,0135* Reject LCPI is stationary
stationary
LMS is not stationary 0,2539 Do not reject LMS is non-stationary
LER is not stationary 0,0000* Reject LER is stationary
LIR is not stationary 0,0002* Reject LIR is stationary
(*) means significant at 5% critical level
The results of ADF test at first difference conclude that all variables are stationary, except MS.
So we need to run ADF test at second difference at level for MS variables since it follows a pure
random walk at first difference. From table 7, we can see that the p-value (0%) is less than
critical level (5%). We reject the null hypothesis and conclude that MS variable is stationary at
second difference.
Table 7: ADF test at difference

Null hypothesis P value Null hypothesis Results
LMS is not stationary 0,0000* Reject LMS is
stationary
5.2 Regression Output (OLS)
Our OLS equation is as follows:
Where D is the first difference and DD is the second difference. The model output is summarized
in table 8.
Table 8: The Effects of Macroeconomic Variables on Stock Market Prices

Variable Coefficient t-Statistic Probability
C 0,008853 2,233070 0,0265
24
DLCPI – 2,066528 – 2,069061* 0,0396
DDLMS 0,119401 1,215672 0,2253
DLIR – 0,048940 – 1,043833 0,2976
DLER – 1,190890 – 5,493487* 0,0000
R-squared 0,128075
Adjusted R- 0,113106
squared
F-statistic 8,556205
N 238
Note: DLOMXS30, DLCPI, DLIR and DLER denote the first difference of the log values of
stock price index (OMXS30), consumer price index, interest rate, exchange while DDLMS
denotes the second difference of the log value of money supply. (*) sign means significant at
5% critical level.
Table 8 presents the output of the Ordinary Least Square (OLS) method to show the impact of the
macroeconomics variables on stock market prices. I can be noticed that both the predicted and all
the predictor variables are log-transformed. This is associated with the price elasticity meaning
that the percentage change in Y is caused by one percentage change in X. For example in the case
of this study, 1% change in inflation will cause stock prices to decrease by 206%. The output
from table 8 shows a significant relationship between inflation (DLCPI) and stock price index
(since its p-value 0.0396 is less than 5%). The negative sign of the coefficients means that
increase in inflation will cause stock price to fall. This is consistent with the previous evidence of
a negative and significant linkage between inflation and stock returns (Lintner, 1973; Fama and
Schwert, 1977). Another negative significant linkage is found between exchange rate and stock
prices as it can be seen on its negative coefficient sign and its p-value (0.0000<0.05). This means
that depreciation of currency will cause the stock price to fall and this result confirms early
evidence (Doong et al, 2005). Although the other macroeconomic variables are not significant,
their coefficient signs confirm our expectations. Indeed, the money supply coefficient is positive,
meaning that an increase in money supply will cause the price to increase as well. The negative
coefficient sign of the interest rate means that an increase in the interest rate will cause the stock
price to decrease.
25
5.3 Residuals diagnostics
To confirm and trust the T-test results from our OLS regression, we have to make sure that the
residuals are white noise. Residuals from a regression should never contain any systematic
information, since this is a sign that this information is not included in the regression model.
5.3.1 Correlogram for the Residuals
Figure 2: correlogram for the Residuals

Date: 05/15/13 Time: 17:05
Sample: 1993M03 2012M12
Included observations: 238
Autocorrelation Partial Correlation AC PAC Q-Stat Prob
.|. | .|. | 1 0.038 0.038 0.3533 0.552

.|. | .|. | 2 -0.007 -0.009 0.3660 0.833
.|* | .|* | 3 0.137 0.138 4.9348 0.177
.|. | .|. | 4 0.035 0.024 5.2256 0.265
.|. | .|. | 5 0.028 0.029 5.4179 0.367
.|* | .|* | 6 0.092 0.074 7.5181 0.276
.|. | .|. | 7 -0.047 -0.062 8.0672 0.327
.|. | .|. | 8 0.045 0.045 8.5731 0.380
.|. | .|. | 9 0.022 -0.007 8.6972 0.466
*|. | *|. | 10 -0.073 -0.066 10.049 0.436
.|. | .|. | 11 0.062 0.058 11.004 0.443
.|. | .|. | 12 0.067 0.052 12.134 0.435
*|. | *|. | 13 -0.107 -0.089 15.033 0.305
.|. | .|. | 14 -0.006 -0.017 15.042 0.375
.|. | .|. | 15 -0.040 -0.056 15.443 0.420
.|. | .|. | 16 0.019 0.053 15.540 0.486
.|. | .|. | 17 -0.029 -0.046 15.763 0.541
.|. | .|. | 18 -0.006 0.018 15.772 0.608
.|* | .|* | 19 0.074 0.091 17.194 0.577
.|. | .|. | 20 -0.028 -0.049 17.394 0.627
.|. | .|. | 21 -0.011 0.017 17.426 0.685
.|. | .|. | 22 0.023 0.000 17.570 0.731
.|. | .|. | 23 0.044 0.041 18.092 0.752
.|. | .|. | 24 0.034 0.033 18.404 0.783
.|. | .|. | 25 0.005 -0.004 18.412 0.824
.|. | .|. | 26 0.000 0.008 18.413 0.860
.|. | .|. | 27 -0.009 -0.038 18.433 0.890
*|. | *|. | 28 -0.140 -0.166 23.757 0.694
.|. | .|. | 29 -0.043 -0.016 24.271 0.715
.|. | .|. | 30 -0.019 -0.047 24.368 0.755
*|. | .|. | 31 -0.078 -0.046 26.054 0.719
.|. | .|. | 32 0.003 0.049 26.056 0.761
*|. | .|. | 33 -0.067 -0.060 27.295 0.747
.|. | .|. | 34 -0.007 0.054 27.308 0.785
.|. | .|. | 35 0.042 0.015 27.794 0.802
.|. | .|. | 36 -0.030 0.008 28.056 0.825
26
Figure 2 is the Eviews output of correlogram for the residuals. We cannot see any pattern in the
SAC or SPAC which ensures the robustness of the results.
5.3.2 Serial Correlation LM Test
The presence of serial correlation is examined by Breusch-Godfrey Serial Correlation LM Test.

Residuals for OLS output is tested for serial correlation, using the following hypothesis:
: No autcorrelation
Autocorrelation
Table 9: Breusch-Godfrey Serial Correlation LM Test
F-statistic 0.180342 Prob. F(2,231) 0.8351

Obs*R-squared 0.371034 Prob. Chi-Square(2) 0.8307
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 05/15/13 Time: 17:07
Sample: 1993M03 2012M12
Presample missing value lagged residuals set to zero.
Variable Coefficient Std. Error t-Statistic Prob.
C -2.51E-05 0.003979 -0.006303 0.9950

DLER 0.006635 0.218884 0.030314 0.9758
DLIR 0.001296 0.047124 0.027493 0.9781
DDLMS -0.003736 0.098794 -0.037821 0.9699
DLCPI 0.034184 1.003992 0.034048 0.9729
RESID(-1) 0.039047 0.066153 0.590251 0.5556
RESID(-2) -0.008835 0.066265 -0.133322 0.8941
R-squared 0.001559 Mean dependent var -3.13E-18

Adjusted R-squared -0.024375 S.D. dependent var 0.057434
S.E. of regression 0.058130 Akaike info criterion -2.823294
Sum squared resid 0.780575 Schwarz criterion -2.721169
Log likelihood 342.9720 Hannan-Quinn criter. -2.782136
F-statistic 0.060114 Durbin-Watson stat 1.997244
Prob(F-statistic) 0.999126
Table 9 is the summary of the serial correlation LM test from Eviews. The p-value is 83.51%
which is greater than critical value, 5%. We cannot reject the null hypothesis and we can
conclude for the absence of autocorrelation.
27
5.3.3 Heteroscedasticity Test
This test is important to confirm the robustness of the OLS output since we cannot rely on them
in the presence of heteroscedasticity. The hypotheses are:
No heteroscedasticity
Heteroscedasticity
Table 10 summarizes the Eviews output from the Heteroscedasticity test. The p-value is 0, 7134
which is greater than critical value, 5%. So we cannot reject the null hypothesis and we can
conclude that homoscedasticity is present, and thus OLS t-test results can be trusted.
Table 10: Heteroscedasticity Test: Breusch-Pagan-Godfrey
F-statistic 0.530595 Prob. F(4,233) 0.7134

Obs*R-squared 2.148355 Prob. Chi-Square(4) 0.7085
Scaled explained SS 2.649181 Prob. Chi-Square(4) 0.6181
Test Equation:
Dependent Variable: RESID^2
Date: 05/15/13 Time: 17:10
Sample: 1993M03 2012M12
C 0.003168 0.000363 8.730136 0.0000

DLER 0.020543 0.019840 1.035418 0.3015
DLIR -0.001944 0.004291 -0.453121 0.6509
DDLMS -0.004601 0.008989 -0.511804 0.6093
DLCPI 0.095540 0.091410 1.045175 0.2970
R-squared 0.009027 Mean dependent var 0.003285

Adjusted R-squared -0.007986 S.D. dependent var 0.005280
5.3.4 Normality Test
This test is important to find out whether the error term follows normal distribution and the
hypotheses are stated as follows:
28
Residuals are normally distributed
Residuals are not normally distributed
Figure 3 shows the Eviews output. The histogram shows that residuals are not normally
distributed. The non-normality of residuals is also confirmed by the Jarque-Bera test since the p-
value (0, 005193) is smaller than the critical value at the 5% level. So, the null hypothesis can be
rejected, thus residuals are not normally distributed. The non-normal behavior observed can be
explained by the fact that consumer price index increases continuously during the period of
examination (appendix Figure 5a) compared to the other variables where we can observe some
upward or downward movements over the 20-year time span.
Although the residuals are non-normally distributed, we can rely on our t-tests results since we
use a reasonably large sample in our linear regression.
Figure 3: Histogram of residuals and Jarque-Bera test

24
Series: Residuals
Sample 1993M03 2012M12
20
Observations 238
16 Mean -3.13e-18
Median 0.001095
Maximum 0.139142
12 Minimum -0.180475
Std. Dev. 0.057434
8 Skewness -0.427880
Kurtosis 3.573224
4 Jarque-Bera 10.52070
Probability 0.005193
0
-0.15 -0.10 -0.05 0.00 0.05 0.10
From our diagnostic checking results, we can assume that residuals from our linear regression are
white noise, meaning that they do not contain any systematic information. However, in reality it
is hard to find a model with completely white noise residuals; this is confirmed by the normality
test where we found that residuals are not normally distributed.
5.3.5 Granger Causality Test

The Granger Causality test is a statistical hypothesis test to determine whether one time series is
significant in forecasting another. This test aims at determining whether past values of a variable
help to predict changes in another variable (Granger, 1988). In addition, it also says that variable
29
Y is Granger caused by variable X if variable X assists in predicting the value of variable Y
(Sarbapriya, 2012).
In our empirical research, the Granger Causality test is conducted to study the causal relationship
between the macroeconomic variables and the Stockholm Stock Exchange. By applying the ADF
test, the first difference of four variables and second difference MS is performed to obtain
stationary variables before using them on Granger causality test. Table 11 below reports the
Granger causality test results with a lag of 4 as the lag selection.
We can conclude that there is a unidirectional relationship between inflation rate (CPI) and stock
price since we reject the null hypothesis that DLCPI does not Granger Cause DLOMXS30; the
p-value (1,75%) is less that the critical value (5%). This means that that inflation Granger causes
stock price.
The overall Granger Causality test reveals that only inflation granger causes the stock prices
while the stock prices do not affect any of the four macroeconomic variables included in the
research.
Table 11: Test for Granger Causality between Stock Index and the Macroeconomic
Variables
Null Hypothesis P-Value Result Relationship
DLCPI does not Granger Cause DLOMXS30 0,0175* Reject Unidirectional
relation
DLOMXS30 does not Granger Cause DLCPI 0,5930 Do not reject
DDLMS does not Granger Cause DLOMXS30 0,7617 Do not reject No relation
DLOMXS30 does not Granger Cause DDLMS 0,3645 Do not reject
DLER does not Granger Cause DLOMXS30 0,6741 Do not reject No relation
DLOMXS30 does not Granger Cause DLER 0,1719 Do not reject
DLIR does not Granger Cause DLOMXS30 0,2604 Do not reject No relation
DLOMXS30 does not Granger Cause DLIR 0,1403 Do not reject
30
6 Discussion and Conclusion
The role of the stock market in the economy is to raise capital and also to ensure that the funds
raised are utilized in the most profitable opportunities. This empirical report performs the
necessary analysis to answer whether changes in the identified macroeconomic variables affect
stock prices of the Stockholm Stock Exchange. The research employs regression analysis and
Granger causality test to examine these relationships. The linear regression test results show that
high inflation and Swedish krona depreciation against the Euro are negatively and significantly
related to the stock prices of the Stockholm Stock Exchange (OMXS30). Besides inflation and
exchange rate, there is also a negative but insignificant relationship between interest rate and
stock price.
The negative relationship between inflation and stock price can be explained by the fact that
additional funds flow due to inflation increase the supply in the stock market while the demand
side remains unaffected. This static condition on the demand side of the security market puts
downward pressure on the stock price. It is important for investors to follow the CPI because
periods of high inflation make difficult the market conditions. Besides, deprecation of Swedish
krona (exchange rate) and high interest rate decrease the flow of capital and this will also
decrease the additional funds flowing in the stock market. On the other hand, a positive
relationship is found between stock price and money supply although it is insignificant.
Furthermore, the Granger causality test shows that inflation is the only macroeconomic variable
that causes stock price while stock price has no effect on any of the macroeconomic variables.
On the basis of the above overall analysis, it can be concluded that two out of the four selected
macroeconomic variables are relatively significant and likely to influence the stock prices of the
Stockholm Stock Exchange. These macroeconomic variables are inflation and exchange rate. The
evidence of this study is consistent with other similar studies. However, the results from this
empirical research should not be a conclusive indicator for investment.
6.1 Further Research

Besides macroeconomic conditions, there are many other factors that affect the prices of stocks
and its movements. A host of such factors are found in the microeconomic variables. The idea is
31
that the performance of particular companies and their results matter in determining the price of a
stock. Indeed, high corporate profits lead to higher stock prices due to high demand. Moreover
rumors of positive news for firms and the re-purchase of shares listed give a positive impact and
lead to higher stock prices. Thus for further study, we could discuss the role of micro economic
factors on stock price and how an investor can reduce microeconomic risk by undertaking a
strong portfolio diversification strategy
32
7 References
Abeyratna G., Anirut P., and David M. P. (2004) “Macro-economic Influences on the Stock
Market Evidence from an Emerging Market in South Asia” Journal of Emerging Market
Finance, December 2004,, Vol. 3, no. 3, 285-304.
Ajayi R.A. and Mougoue M. (1996) “On the Dynamic Relation between Stock Prices and
Exchange rates” The Journal of Financial Research 19, 193-207.
Avneet K. A., Chandni M., and Saakshi C. (2012) “A Study of the effect of Macroeconomic
Variables on Stock Market: Indian Perspective”. Electronic copy available at:
http://ssrn.com/abstract=2178481.
Bahmani-Oskooee M., and Sohrabian A. (1992) “Stock prices and the effective exchange rate of
the dollar” Applied Economics, 24 (4): 459-64.
Bhattacharya B, Mookherjee J (2001), Causal relationship between and exchange rate, foreign
exchange reserves, value of trade balance and stock market: case study of India. Department of
Economics, Jadavpur University, Kolkata, India.
Barro R. J. (1990) “The Stock Market and Investment” Review of Financial Studies 3, 115–131.
Barro R. J. (1974) “Are Government Bonds Net Worth?” Journal of Political Economy 82, pp.
1095-1117.
Blanchard O.J. (1987) “Vector Autoregressions and Reality: Comment” Journal of Business and
Economic Statistics, 1987, Vol. 5, No. 4, pp. 449-451.
Chen, N. F., Richard Roll and Stephen A. Ross (1986) “Economic Forces and the Stock Market”,
Journal of Business, 59, pp. 383-403.
Choi D., and Jen F. (1991) “The relation Between Stock Returns and Short-Term Interest Rates”
Review of Quantitative Finance and Accounting, 1991, Vol. 1, pp. 75-89.
Connor G., and Korajczyk A. R. (1993) “The Arbitrage Pricing Theory and Multifactor Models
of Asset Returns” Working paper # 139.
33
Conover M. C., Jensen G. R., and Johnson R. R. (1998) “Monetary Environments and
International Stock Returns”, Journal of Banking and Finance, 1999, Vol. 23, pp. 1357-1381.
Cooper, R.V. (1974) “Efficient Capital Markets and the Quantity Theory of Money”, Journal of
Finance, 24, pp. 887-921.
Darat, A.F. and Mukherjee T. K. (1987) “The Behaviour of a Stock Market in a Developing
Economy”, Economic Letters, 22, 273-278.
Darrat, A. F. (1990a). “Stock Returns, Money and Fiscal Deficits”, Journal of Financial and
Quantitative Analysis 25, 387-398.
Dhakal, D., M. Kandil, and S. C. Sharma (1993) “Causality between the Money Supply and
Share Prices: A VAR Investigation” Quarterly Journal of Business and Economics 32, 52–74.
Dickey, D.A, Fuller, W.A. (1979) “Distributions of the Estimators for Autoregressive Time
Series with a Unit Root”, Journal of American Statistical Association 74:366, pp. 427-481.
Doong, S.-Ch., Yang, Sh.-Y., Wang, A., (2005) “The dynamic relationship and pricing of stocks
and exchange rates: Empirical evidence from Asian emerging markets,” Journal of American
Academy of Business, Cambridge, Vol.7, No1, pp.118-23.
Elton, J. E., Gruber, M. J., Brown, S. J. and Goetzmann, W. N., (2010) “Modern Portfolio Theory
and Investment Analysis”, 8th International student edition, John Wiley & Sons.
Fama, E. (1970) “Efficient Capital Markets: A Review of Theory and Empirical Work” The
Journal of Finance, Vol. 25, No. 2, pp. 383-417.
Fama, E.F. (1981) “Stock returns, real Activity, Inflation, and Money”, The American Economic
Review, 71(4), 545-565.
Fama, E., F, (1990) “Stock returns, expected returns, and real activity”, The Journal of Finance
45, 1089-1108.
Fama, E. F. and K. R. French (1989) “Business Conditions and Expected Returns on Stocks and
Bonds”, The Journal of Financial Economics 25, 23–49.
34
Fama, E.F. and Schwert, W., (1977), “Asset returns and inflation”, Journal of Financial
Economics, Vol. 5, pp. 115-46.
Firth, M., (1979), “The relationship between stock market returns and rates of inflation”, Journal
of Finance, Vol. 34, 743-49.
Geetha C., Mohidin R., Chandran V. V., and Chong V. (2011) “The Relationship between
Inflation and Stock Market: Evidence from Malaysia, United States and China”. International
Journal of Economics and Management Sciences, Vol. 1, No. 2, 2011, pp. 01-16.
Gjerdr, Oystein and Frode Saettem (1999), “Causal Relation among Stock Returns and
Macroeconomic Variables in a Small, Open Economy”, Journal of International Financial
markets, Institutions and Money, Vol. 9, pp. 61-74.
Gujrati, D.N. and D.C. Porter (2009) Basic Econometrics, Fifth Edition, McGraw Hill, USA.
Granger, C. W. J. (1981), “Some properties of Time Series Data and their use in Econometric
Model Specification”, Journal of Econometrics, Annals of Applied Econometrics, 16: 121-30.
Granger, C.W.J (1986), “Developments in the Study of Cointegrated Economic Variables”,

Oxford Bulletin of Economics and Statistics, nr. 48.
Grossman, S.J and Shiller R.J. (1981) “The Determinants of the Variability of Stock Market
Prices”, The American Review 1981, Vol. 71, No. 2, pp. 222-227.
Hamburger Michael J. and Levis A. Kochin (1971) “Money and Stock Prices: The Channels of
Influences”, The Journal of Finance, 27(2): 231-249.
Homa, Kenneth E. and Dwight M. Jaffee. 1971. “The Supply of Money and Common Stock
Prices”, Journal of Finance, 26(5): 1045-1066.
Jaffe, J.F. and Mandelker, G., (1977) “The ‘Fisher Effect’ for risky assets: An empirical
investigation”, Journal of Finance, Vol. 32, 447-58.
Jensen G. R., Mercer J. M., Johnson R. R. (1995) ”Business Conditions, Monetary Policy, and
Expected Security Returns”, Journal of Financial Economics, 1996, Vol. 40, pp. 213-237.
35
Lintner, J., (1973), “Inflation and common stock prices in a cyclical context”, National Bureau of
Economic Research Annual Report.
Mahedi Masuduzzaman (2012) “Impact of the Macroeconomic Variables on the Stock Market
Returns: The Case of Germany and the United Kingdom”, Global Journal of Management and
Business Research.
Mohammad, B.A. (2011) “Impact of Micro and Macroeconomic Variables on Emerging Stock
Market Return: A Case on Dhaka Stock Exchange (DSE)”, Interdisciplinary Journal of Research
in Business.
Roll, Richard (1977) “A critique of the asset pricing theory's tests”, Journal of Financial
Economics, March 1977, p. 129.
Roll, Richard and Stephen Ross (1980) “An empirical investigation of the arbitrage pricing
theory”, Journal of Finance, Dec 1980, p. 1073.
Roll, Richard and Stephen Ross (1984) “The Arbitrage Pricing Theory Approach to Strategic
Portfolio Planning”, Financial Analysts Journal, Vol. 40, No. 3 (May-June 1984), pp. 14-99 +
22-26.
Sellin, Peter (2001) “Monetary Policy and the Stock Market: Theory and Empirical Evidence.”,
Journal of Economic Surveys, 2001, 15 (4), pp. 491-541.
Sarbapriya, Ray (2012) “Foreign Exchange Reserve and its Impact on Stock Market
Capitalization: Evidence from India”, Research on Humanities and Social Sciences, Vol.2, No.2,
2012.
Uddin, M. G. S. and Alam, M. M. (2007) “The Impacts of Interest Rate on Stock Market:
Empirical Evidence from Dhaka Stock Exchange”, South Asian Journal of Management and
Sciences, 1(2), 123-132.
36
8 Appendix
8.1 Appendix 1: ADF Test
8.1.1 Stock Price (OMXS30)
Figure 4a: Data graph set at level Figure 4b: Data graph set at first difference
LOMXS30 DLOMXS30
7.6 .20
7.2 .15
.10
6.8
.05
6.4
.00
6.0
-.05
5.6
-.10
5.2 -.15
4.8 -.20
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Table 12a: Unit Root test at level
Null Hypothesis: LOMXS30 has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=14)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -2.338122 0.4113

Test critical values: 1% level -3.996918
5% level -3.428739
10% level -3.137804
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOMXS30)
Date: 05/08/13 Time: 15:06
Sample (adjusted): 1993M02 2012M12
Included observations: 239 after adjustments
LOMXS30(-1) -0.028889 0.012356 -2.338122 0.0202

C 0.188962 0.073084 2.585527 0.0103
@TREND(1993M01) 6.18E-05 8.80E-05 0.702575 0.4830

Adjusted R-squared 0.025429 S.D. dependent var 0.061724
37
Table 12b: Unit Root test at First Difference
Null Hypothesis: DLOMXS30 has a unit root

Exogenous: Constant
t-Statistic Prob.*

5% level -2.873492
10% level -2.573215

Dependent Variable: D(DLOMXS30)
Date: 05/08/13 Time: 15:06
DLOMXS30(-1) -0.915322 0.064499 -14.19131 0.0000

C 0.006658 0.004012 1.659553 0.0983
R-squared 0.460440 Mean dependent var -0.000382

38
8.1.2 Consumer Price Index (CPI)
Figure 5a: Data graph set at Level Figure 5b: Data graph set at first difference
DLCPI
LCPI
.015
5.76
5.72 .010
5.68
.005
5.64
.000
5.60
-.005
5.56
-.010
5.52
5.48 -.015
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Table 13a: Unit Root test at level
Null Hypothesis: LCPI has a unit root

t-Statistic Prob.*

5% level -3.429745
10% level -3.138397

Dependent Variable: D(LCPI)
Date: 05/08/13 Time: 15:05
LCPI(-1) -0.062361 0.018453 -3.379350 0.0009

D(LCPI(-1)) 0.076480 0.061712 1.239306 0.2166
D(LCPI(-2)) -0.003993 0.062184 -0.064218 0.9489
D(LCPI(-3)) 0.060000 0.061247 0.979641 0.3284
D(LCPI(-4)) -0.041234 0.061320 -0.672441 0.5020
D(LCPI(-5)) 0.098577 0.059815 1.648046 0.1008
D(LCPI(-6)) 0.174093 0.060284 2.887886 0.0043
D(LCPI(-7)) 0.097530 0.061132 1.595390 0.1121
D(LCPI(-8)) -0.100681 0.061567 -1.635314 0.1035
D(LCPI(-9)) 0.008292 0.061434 0.134974 0.8928
D(LCPI(-10)) -0.065693 0.061549 -1.067324 0.2870
D(LCPI(-11)) 0.021451 0.061714 0.347587 0.7285
D(LCPI(-12)) 0.453105 0.062955 7.197310 0.0000
39
C 0.342300 0.101116 3.385223 0.0008
@TREND(1993M01) 6.78E-05 2.02E-05 3.357009 0.0009

Table 13b: Unit root test at first difference
Null Hypothesis: DLCPI has a unit root

Exogenous: Constant
t-Statistic Prob.*

5% level -2.874143
10% level -2.573563

Dependent Variable: D(DLCPI)
Date: 05/08/13 Time: 15:05
DLCPI(-1) -0.723163 0.215339 -3.358253 0.0009

D(DLCPI(-1)) -0.165876 0.213223 -0.777947 0.4375
D(DLCPI(-2)) -0.202589 0.202566 -1.000116 0.3184
D(DLCPI(-3)) -0.192171 0.191045 -1.005894 0.3156
D(DLCPI(-4)) -0.266742 0.181621 -1.468670 0.1434
D(DLCPI(-5)) -0.212837 0.173083 -1.229685 0.2202
D(DLCPI(-6)) -0.053967 0.166606 -0.323918 0.7463
D(DLCPI(-7)) 0.025794 0.157323 0.163957 0.8699
D(DLCPI(-8)) -0.108493 0.143267 -0.757281 0.4497
D(DLCPI(-9)) -0.149503 0.125576 -1.190544 0.2352
D(DLCPI(-10)) -0.248080 0.108681 -2.282651 0.0234
D(DLCPI(-11)) -0.263714 0.089662 -2.941199 0.0036
D(DLCPI(-12)) 0.168842 0.069071 2.444470 0.0153
C 0.000767 0.000319 2.406206 0.0170

40
8.1.3 Money Supply (MS)
LMS DLMS
11.6 .12
11.5
.08
11.4
.04
11.3
11.2
.00
11.1
-.04
11.0
10.9 -.08
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Figure 6c: Data graph set at second difference

DDLMS
.10
.05
.00
-.05
-.10
-.15
-.20
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Table 14a: Unit root test at level

Null Hypothesis: LMS has a unit root
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic 1.153678 0.9999

5% level -3.429745
10% level -3.138397

Dependent Variable: D(LMS)
Date: 05/08/13 Time: 15:01
41
LMS(-1) 0.012705 0.011013 1.153678 0.2499
D(LMS(-1)) -0.194199 0.049617 -3.913928 0.0001
D(LMS(-2)) -0.153366 0.049583 -3.093099 0.0022
D(LMS(-3)) -0.104475 0.049550 -2.108451 0.0362
D(LMS(-4)) -0.102580 0.048886 -2.098362 0.0371
D(LMS(-5)) -0.116333 0.048791 -2.384333 0.0180
D(LMS(-6)) -0.061414 0.048984 -1.253751 0.2113
D(LMS(-7)) -0.083419 0.048580 -1.717142 0.0874
D(LMS(-8)) -0.043951 0.048045 -0.914790 0.3613
D(LMS(-9)) -0.063902 0.046897 -1.362618 0.1744
D(LMS(-10)) -0.111102 0.045831 -2.424152 0.0162
D(LMS(-11)) -0.090414 0.045049 -2.007003 0.0460
D(LMS(-12)) 0.736823 0.043197 17.05740 0.0000
C -0.133221 0.120549 -1.105118 0.2704
@TREND(1993M01) -7.16E-05 3.44E-05 -2.078582 0.0389


Null Hypothesis: DLMS has a unit root
Exogenous: Constant
t-Statistic Prob.*

5% level -2.874086
10% level -2.573533

Dependent Variable: D(DLMS)
Date: 05/08/13 Time: 15:02
DLMS(-1) -0.496402 0.238890 -2.077954 0.0389

D(DLMS(-1)) -0.623308 0.221541 -2.813504 0.0054
D(DLMS(-2)) -0.698767 0.205643 -3.397968 0.0008
D(DLMS(-3)) -0.724025 0.190926 -3.792173 0.0002
D(DLMS(-4)) -0.747705 0.176362 -4.239596 0.0000
D(DLMS(-5)) -0.785072 0.160822 -4.881614 0.0000
D(DLMS(-6)) -0.766876 0.144662 -5.301171 0.0000
42
D(DLMS(-7)) -0.772039 0.126651 -6.095783 0.0000
D(DLMS(-8)) -0.739469 0.107656 -6.868812 0.0000
D(DLMS(-9)) -0.730786 0.086601 -8.438530 0.0000
D(DLMS(-10)) -0.772972 0.062900 -12.28884 0.0000
D(DLMS(-11)) -0.797253 0.036328 -21.94611 0.0000
C 0.000362 0.000800 0.452186 0.6516

Table 14c: Unit root test at second difference

Null Hypothesis: DDLMS has a unit root
Exogenous: Constant
t-Statistic Prob.*

5% level -2.874143
10% level -2.573563

Dependent Variable: D(DDLMS)
Date: 05/08/13 Time: 15:03
DDLMS(-1) -14.00613 0.967513 -14.47642 0.0000

D(DDLMS(-1)) 11.76581 0.912289 12.89702 0.0000
D(DDLMS(-2)) 10.49057 0.846878 12.38734 0.0000
D(DDLMS(-3)) 9.230660 0.771368 11.96661 0.0000
D(DDLMS(-4)) 7.986648 0.687349 11.61949 0.0000
D(DDLMS(-5)) 6.739393 0.596365 11.30079 0.0000
D(DDLMS(-6)) 5.544024 0.500154 11.08463 0.0000
D(DDLMS(-7)) 4.379441 0.402986 10.86748 0.0000
D(DDLMS(-8)) 3.285571 0.307751 10.67606 0.0000
D(DDLMS(-9)) 2.242790 0.218507 10.26418 0.0000
D(DDLMS(-10)) 1.199476 0.137373 8.731499 0.0000
D(DDLMS(-11)) 0.174398 0.064287 2.712804 0.0072
C -0.000515 0.000698 -0.737762 0.4615

43
8.1.4 Interest Rate (IR)
LIR DLIR
2.5 .6
2.0
.4
1.5
.2
1.0
0.5 .0
0.0
-.2
-0.5
-.4
-1.0
-1.5 -.6
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Null Hypothesis: LIR has a unit root
Exogenous: Constant
t-Statistic Prob.*

5% level -2.873543
10% level -2.573242

Dependent Variable: D(LIR)
Date: 05/08/13 Time: 15:17
LIR(-1) -0.014248 0.005526 -2.578167 0.0105

D(LIR(-1)) 0.296381 0.057978 5.111939 0.0000
D(LIR(-2)) 0.454985 0.058129 7.827099 0.0000
C 0.013960 0.007511 1.858625 0.0643

44

Null Hypothesis: DLIR has a unit root
Exogenous: Constant
t-Statistic Prob.*

5% level -2.873543
10% level -2.573242

Dependent Variable: D(DLIR)
Date: 05/08/13 Time: 14:57
DLIR(-1) -0.258343 0.056443 -4.577098 0.0000

D(DLIR(-1)) -0.442473 0.058621 -7.547983 0.0000
C -0.002245 0.004161 -0.539488 0.5901

45
8.1.5 Exchange Rate
LER DLER
2.45 .08
2.40 .06
2.35 .04
2.30 .02
2.25 .00
2.20 -.02
2.15 -.04
2.10 -.06
2.05 -.08
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Null Hypothesis: LER has a unit root

Exogenous: Constant
t-Statistic Prob.*

5% level -2.873440
10% level -2.573187

Dependent Variable: D(LER)
Date: 05/08/13 Time: 14:32
LER(-1) -0.050037 0.020624 -2.426166 0.0160

C 0.110527 0.045616 2.422967 0.0161

46
Null Hypothesis: DLER has a unit root

Exogenous: Constant
t-Statistic Prob.*

5% level -2.873492
10% level -2.573215

Dependent Variable: D(DLER)
Date: 05/08/13 Time: 14:37
DLER(-1) -1.003017 0.064596 -15.52755 0.0000

C -0.000255 0.001146 -0.222318 0.8243

8.2 Appendix 2: Eviews output Ordinary Linear Square Test
Table 17: Ordinary Linear Square Test

Dependent Variable: DLOMXS30
Date: 05/15/13 Time: 16:21
C 0.008853 0.003965 2.233070 0.0265

DLER -1.190890 0.216782 -5.493487 0.0000
DLIR -0.048940 0.046885 -1.043833 0.2976
DDLMS 0.119401 0.098218 1.215672 0.2253
DLCPI -2.066528 0.998776 -2.069061 0.0396
47
8.3 Appendix 3: Eviews output Granger Causality Tests
Table 18: Granger causality tests
Pairwise Granger Causality Tests

Date: 05/15/13 Time: 16:32
Sample: 1993M01 2012M12
Lags: 4
Null Hypothesis: Obs F-Statistic Prob.
DLCPI does not Granger Cause DLOMXS30 235 3.06201 0.0175

DLOMXS30 does not Granger Cause DLCPI 0.69950 0.5930
DLER does not Granger Cause DLOMXS30 235 0.58462 0.6741

DLOMXS30 does not Granger Cause DLER 1.61287 0.1719
DLIR does not Granger Cause DLOMXS30 235 1.32775 0.2604

DLOMXS30 does not Granger Cause DLIR 1.74816 0.1403
DDLMS does not Granger Cause DLOMXS30 234 0.46457 0.7617

DLOMXS30 does not Granger Cause DDLMS 1.08535 0.3645
DLER does not Granger Cause DLCPI 235 0.41512 0.7977

DLCPI does not Granger Cause DLER 0.26841 0.8981
DLIR does not Granger Cause DLCPI 235 4.47235 0.0017

DLCPI does not Granger Cause DLIR 0.30250 0.8761
DDLMS does not Granger Cause DLCPI 234 7.43796 1.E-05

DLCPI does not Granger Cause DDLMS 29.6546 8.E-20
DLIR does not Granger Cause DLER 235 1.28290 0.2775

DLER does not Granger Cause DLIR 2.89778 0.0229
DDLMS does not Granger Cause DLER 234 0.73560 0.5685

DLER does not Granger Cause DDLMS 0.65910 0.6210
DDLMS does not Granger Cause DLIR 234 0.59499 0.6666

DLIR does not Granger Cause DDLMS 0.34375 0.8482
48

FULLTEXT02

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FULLTEXT02

Uploaded by

Copyright:

Available Formats

JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL

Impact of Macroeconomic Variables on the Stock Market Prices of the

Master´s Thesis within International Financial Analysis

Author: Joseph Tagne Talla

Tutors: Per-Olof Bjuggren, Louise Nordström

Jönköping, May 2013

Author: Joseph Tagne Talla

Tutors: Per-Olof Bjuggren, Louise Nordström

Keywords: Macroeconomics variables, stock prices, OLS, Granger Causality test.

ADF……………………………… Augmented Dickey-Fuller

APT……………………………… Asset Pricing Theory

CAPM…………………………… Capital Asset Pricing Model

OMXS30……………………........ OMX Stockholm 30

OLS……………………………… Ordinary Least Square

2 Theoretical Framework ..................................................................................... 9

3 Literature Review ............................................................................................ 12

5 Empirical Results ............................................................................................. 22

6 Discussion and Conclusion .............................................................................. 31

2.1 The Efficient Market Hypothesis

Figure 1: Stockholm stock Price Index (1993-2012)

1992-01-31 2012-12-31 M OMX STOCKHOLM 30 (OMXS30) - PRICE INDEX

Table 1: Impact of macroeconomic variables on stock market

4.1 Variables description and Expectation

Dependent variable; OMX Stockholm 30 (OMXS30)

Consumer Price Index (CPI)

Interest Rate (IR)

Exchange Rate (ER)

Money Supply (MS)

Table 2: Regression Variables

MS Money supply (M0), Sveriges Riksbank, +

Table 3: Descriptive statistics for 1993-2012

The null and alternative hypotheses are as follows:

Unit root [Variable is not stationary]

No unit root [Variable is stationary]

Table 5: ADF Test at level, intercept

Table 7: ADF test at difference

5.2 Regression Output (OLS)

Our OLS equation is as follows:

Table 8: The Effects of Macroeconomic Variables on Stock Market Prices

5.3.1 Correlogram for the Residuals

Figure 2: correlogram for the Residuals

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

.|. | .|. | 1 0.038 0.038 0.3533 0.552

5.3.2 Serial Correlation LM Test

The presence of serial correlation is examined by Breusch-Godfrey Serial Correlation LM Test.

Table 9: Breusch-Godfrey Serial Correlation LM Test

F-statistic 0.180342 Prob. F(2,231) 0.8351

Variable Coefficient Std. Error t-Statistic Prob.

C -2.51E-05 0.003979 -0.006303 0.9950

R-squared 0.001559 Mean dependent var -3.13E-18

Table 10: Heteroscedasticity Test: Breusch-Pagan-Godfrey

F-statistic 0.530595 Prob. F(4,233) 0.7134

Variable Coefficient Std. Error t-Statistic Prob.

C 0.003168 0.000363 8.730136 0.0000

R-squared 0.009027 Mean dependent var 0.003285

5.3.4 Normality Test

Residuals are not normally distributed

Figure 3: Histogram of residuals and Jarque-Bera test

5.3.5 Granger Causality Test

DLOMXS30 does not Granger Cause DDLMS 0,3645 Do not reject

DLOMXS30 does not Granger Cause DLER 0,1719 Do not reject

DLOMXS30 does not Granger Cause DLIR 0,1403 Do not reject

(*) means significant at 5% critical level

6.1 Further Research