4th semester Project Literature Review

Submitted by: Mayank joshi Roll no: 627 MBE final year

Literature Review:
Robert D. Gay, Jr.(March 2008) investigated the time-series relationship between stock market index prices and the macroeconomic variables of exchange rate and oil price for Brazil, Russia, India, and China (BRIC) using the Box-Jenkins ARIMA model. Although no significant relationship was found between respective exchange rate and oil price on the stock market index prices of either BRIC country, this may be due to the influence other domestic and international macroeconomic factors on stock market returns. Also, there was no significant relationship found between present and past stock market returns, suggesting the markets of Brazil, Russia, India, and China exhibit the weak-form of market efficiency. Cumhur Erdem, Cem Kaan Arslan and Meziyet Sema Erdem(2005) investigated effects of macroeconomic variables on Istanbul stock exchange indexes Price volatility spillovers in ISE indexes were analyzed based on monthly data from January 1991 to January 2004 for exchange rate, interest rate, inflation, industrial production and M1 money supply. The Exponential Generalized Autoregressive Conditional Heteroscedasticity model was used to test univariate volatility spillovers for macroeconomic variables. It was found that there exists unidirectional strong volatility spillover from inflation, interest rate to all stock price indexes. There are spillovers from M1 money supply to financial index, and from exchange rate to both IMKB 100 and industrial indexes. There is no volatility spillover from industrial production to any index. Andreas Humpe and Peter Macmillan (2007) within the framework of a standard discounted value model examined whether a number of macroeconomic variables influence stock prices in the US and Japan. A cointegration analysis was used in order to model the long term relationship between industrial production, the consumer price index, money supply, long term interest rates and stock prices in the US and Japan. For the US they found that the data is consistent with a single cointegrating vector, where stock prices are positively related to industrial production and negatively related to both the consumer price index and a long term interest rate. Another finding was an insignificant (although positive) relationship between US stock prices and the money supply. However, for the Japanese data there were two cointegrating vectors. They also found that for one vector that stock prices are influenced positively by industrial production and negatively by the money supply. For the second cointegrating vector industrial production to be negatively influenced by the consumer price index and a long term interest rate. Sulaiman D. Mohammad et al (2009) investigated the correlation among the macroeconomics variables and share prices of KSE (Karachi Stock Exchange) in context of Pakistan. The study used several quarterly data for different macroeconomics variables such as foreign exchange reserve, foreign exchange rate, industrial production index (IPI), whole sale price index (WPI), gross fixed capital formation (GFCF) and broad money M2 and studied their effect on share prices using ARIMA model. These variables were from the period 1986-2008. The result

showed that after the reforms in 1991 the influence of foreign exchange rate and foreign exchange reserve significantly affect the stock prices, while other variables like IPI and GFCF are insignificantly affect stock prices. The result also highlighted the internal factors of firm like increase in production and capital formation insignificant while external factor like M2 and foreign exchange affect positively. Serkan Yilmaz Kandir (2008) investigated the role of macroeconomic factors in explaining Turkish stock returns. A macroeconomic factor model was employed for the period that spans from July 1997 to June 2005. Macroeconomic variables used were, growth rate of industrial production index, change in consumer price index, growth rate of narrowly defined money supply, change in exchange rate, interest rate, growth rate of international crude oil price and return on the MSCI World Equity Index. The analysis was based on stock portfolios rather than single stocks. In portfolio construction, four criteria are used: market equity, the book-tomarket equity, the earnings-to-price equity and the leverage ratio. A multiple regression model is designed to test the relationship between the stock portfolio returns and seven macroeconomic factors. Empirical findings revealed that exchange rate, interest rate and world market return seem to affect all of the portfolio returns, while inflation rate is significant for only three of the twelve portfolios. On the other hand, industrial production, money supply and oil prices do not appear to have any significant affect on stock returns. L.M.C.S. Menike(2003) investigated the effects of macroeconomic variables on stock prices in emerging Sri Lankan stock market using monthly data for the period from September 1991 to December 2002. The multivariate regression was run using eight macroeconomic variables for each individual stock. The null hypothesis which states that money supply, exchange rate, inflation rate and interest rate variables collectively do not accord any impact on equity prices was rejected at 0.05 level of significance in all stocks. The results indicated that most of the companies report a higher R2 which justifies higher explanatory power of macroeconomic variables in explaining stock prices.

References:
International Research Journal of Finance and Economics,ISSN 1450-2887 Issue 16 (2008) EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.htm European Journal of Scientific Research ISSN 1450-216X Vol.38 No.1 (2009), pp.96-103 EuroJournals Publishing, Inc. 2009 http://www.eurojournals.com/ejsr.htm http://www.tandfonline.com/loi/rafe20 International Business & Economics Research Journal March 2008 2006 Sabaragamuwa University Journal, vol 6, no. 1