The impact of macroeconomic variables on stock prices in Tanzania

Manamba EPAPHRA, Evidence SALEMA

Abstract


Abstract. This paper examines the relationship between stock prices and macroeconomic variables namely, inflation rate, Treasury bill rate, exchange rate and money supply in Tanzania. The paper uses monthly time series data spanning from January 2012 to December 2016 across 10 companies listed on the Dar es Salaam Stock Exchange. Johansen’s co-integration and vector error correction models have been applied to investigate the long-run relationship between stock prices and macroeconomic variables while considering average stock price on one hand and individual companies stock prices on the other hand. We specify 11 models, whereas model 1 examines the effects of macroeconomic variables on overall stock price, models 2-11 explore the effects of the same macroeconomic variables on individual firm’s stock price across 10 firms. This is important because some firms tend to behave differently as far as changes in macroeconomic variables are concerned. The empirical analysis reveals that macroeconomic variables and the stock prices are co-integrated across all models and, hence, a long-run equilibrium relationship exists between them. Equally important, all regression models pass the specification tests of heteroscedasticity, serial correlation, Ramsey RESET test of specification and Jacque-Bera Normality test. The overall model regression results show that money supply and exchange rate have a positive effect on stock prices. By contrast, Treasury bill rate tends to have a negative effect on stock prices. Inconsistent with the a priori expectation, inflation rate seems to exert no impact on overall stock prices. However, individual firms’ regressions show that the coefficient on inflation is negative and statistically significant in 6 models but weakly significant in 2 models, and positive and statistically significant in 1 model. Similar controversial results across firms are revealed on the other macroeconomic variables while considering individual firms regressions. Nevertheless, money supply is found to be the main determinant of stock and hence, it should be targeted as the main monetary policy aimed at directing the stock market in Tanzania.

Keywords. Stock prices, Macroeconomic variables, Error correction models.

JEL. D51, H54, O24.


Keywords


Stock prices; Macroeconomic variables; Error correction models.

Full Text:


References


Abraham, T.W. (2011). Stock market reaction to selected macroeconomic variables in the Nigerian economy. CBN Journal of Applied Statistics, 2(1), 61-70.

Adam, A.M., & Tweneboah, G. (2008). Macroeconomic factors and stock market movement: Evidence from Ghana. Munich Personal RePEc Archive, MPRA Paper, No.11256.

Aggarwal, R. (1981). Exchange rates and stock prices: A study of the US capital markets under floating exchange rates. Akron Business and Economic Review, 12, 7-12.

Akbar, M., Ali, S., & Khan, M.F. (2012). The relationship of stock prices and macroeconomic variables revisited: Evidence from Karachi Stock Exchange, African Journal of Business Management, 6(4), 1315-1322.

Alam, M. & Uddin, G.S. (2009). Relationship between interest rate and stock price: Empirical evidence from developed and developing countries. International Journal of Business and Management, 4(3), 43-51. doi. 10.5539/ijbm.v4n3p43

Ali, M. (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, 1(5), 8-16.

AL-Sharkas, A. (2004). The dynamic relationship between macroeconomic factors and the Jordanian Stock Market. International Journal of Applied Econometrics and Quantitative Studies, 1(1), 97-114.

Alshogearthi, M. (2011). Macroeconomic determinant of the stock market movement: empirical evidence from the Saudi stock market. Ph.D. Dissertation, Kansas State University.

Benigno, A.M. (2016). Relationships between interest rate changes and stock returns: International evidence using a quantile-on-quantile approach. Master en Banca y Finanzas Cuantitativas, Trabajo de investigación 001/016, Universidad Complutense de Madrid.

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. Working Paper, Jadavpur University Department of Economics, Kolkata, India. [Retrieved from].

Bordo, M.D., Dueker, M.J., & Wheelock, D.C. (2008). Inflation, monetary policy and stock market conditions: Quantitative evidence from a hybrid latent-variable VAR. Federal Reserve Bank of St. Louis Working Paper Series, Working Paper, No.2008-012B. [Retrieved from].

Brooks, C. (2008). Introductory econometrics for finance. 2nd Edition, Cambridge University Press, New York. doi. 10.1017/CBO9780511841644

Chen, N-F., Roll, R., & Ross, A.S. (1986). Economic forces and the stock market. Journal of Business, 59(3), 383-403. jstor.org/stable/2352710

Dinenis, E., & Staikouras, S.K. (1998). Interest rate changes and common stock returns of financial institutions: evidence from the UK, European Journal of Finance, 4(2), 113-127. doi. 10.1080/135184798337344.

Dong, M., Robinson, C., & Veld, C. (2005). Why individual investors want dividends. Journal of Corporate Finance, 12(1), 121-158. doi. 10.1016/j.jcorpfin.2004.04.006

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. The Journal of American Academy of Business, Cambridge, 7(1), 118-123.

Engle, R., & Granger, C. (1987). Co-Integration and error correction: representation, estimation, and testing. Econometrica, 55(2), 251-276. doi. 10.2307/1913236

Epaphra, M. (2016). Foreign direct investment and sectoral performance in Tanzania. Journal of Economics and Political Economy, 3(4), 670-719. doi. 10.1453/jepe.v3i4.1113

Fama, E.F. & Schwert, G.W. (1977). Asset returns and inflation. Journal of Financial Economics, 5(2), 115-146. doi. 10.1016/0304-405X(77)90014-9

Fama, E. F. (1981). Stock returns, real Activity, inflation and money. American Economic Review, 71(4), 545-565.

Firth, M. (1979). The relationship between stock market returns and rates of inflation. The Journal of Finance, 34(3). doi. 10.1111/j.1540-6261.1979.tb02139.x.

Fisher, I. (1930). The Theory of Interest. New York: Macmillan

Flannery, M.J., & James, C.M. (1984). The effect of interest rate changes on the common stock returns of financial institutions. Journal of Finance, 39(4), 1141-1153. doi. 10.1111/j.1540-6261.1984.tb03898.x

Geetha, C., Mohidin, R., Chandran, V., & Chong, V. (2011).The relationship between inflation and stock market: Evidence from Malaysia, United States and China. International Journal of Economics and Management Sciences, 1(2), 1-16.

Gjerdea, Ø. & Sættemb, F. (1999). Causal relations among stock returns and macroeconomic variables in a small, open economy. Journal of International Financial Markets, Institutions & Money, 9(1), 61-74. doi. 10.1016/S1042-4431(98)00036-5.

Hamburger, M.J., & Kochin, L.A. (1972). Money and stock prices: The channels of influences. The Journal of Finance, 27(2), 231-249. doi. 10.2307/2978472.

Hjalmarsson, E., & Österholm, P. (2007). Testing for cointegration using the Johansen methodology when variables are near-integrated, IMF Working Paper, No.07/141.

Homa, K.E., & Jaffee, D.M. (1971). The supply of money and common stock prices. The Journal of Finance, 26(5), 1045-1066. doi. 10.2307/2326082.

Horobet, A., & Dumitrescu, S. (2009). On the causal relationship between stock prices and exchange rates: evidence from Romania. [Retrieved from].

Humpe, A., & Macmillan, P. (2007). Can macroeconomic variables explain long term stock market movements? A comparison of the US and Japan. Centre for Dynamic Macroeconomic Analysis, CDMA Working Paper, No. 07/20.

Ibrahim, M.H., & Aziz, H. (2003). Macroeconomic variables and the malaysian equity market: A view through rolling subsamples. Journal of Economic Studies, 30(1), 6-27. doi. 10.1108/01443580310455241

Jaffe, J.F., & Mandelker, G. (1976). The ‘Fisher effect’ for risky assets: An empirical investigation. The Journal of Finance, 31(2), 447-458. doi. 10.2307/2326616

Johansen, S., & Juselius, K. (1988). Hypothesis testing for cointegration vectors with an application to the demand for money in Denmark and Finland. University of Copenhagen, Working Paper, No.88-05. [Retrieved from].

Khan, K. (2012). Effect of dividends on stock prices: A case of chemical and pharmaceutical industry of Pakistan. Proceedings of 2nd International Conference on Business Management.

Kurihara, Y. (2006). The relationship between exchange rate and stock prices during the quantitative easing policy in Japan. International Journal of Business, 11(4), 375-386.

Kyereboah‐Coleman, A., & Agyire‐Tettey, K.F. (2008). Impact of macroeconomic indicators on stock market performance: The case of the Ghana Stock Exchange. The Journal of Risk Finance, 9(4), 365-378. doi. 10.1108/15265940810895025

Lintner, J. (1973). Inflation and common stock prices in a cyclical context. National Bureau of Economic Research, Annual Report, p. 23-36.

Lynge, M.J., & Zumwalt, J.J. (1980). An empirical study of the interest rate sensitivity of commercial bank returns: A multi-index approach. Journal of Financial and Quantitative Analysis, 15(3), 731-742. doi. 10.2307/2330406

MacKinnon, J., Haug, G., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563-577. doi. 10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R.

Mahmudul, A., & Gazi, S.U. (2009). The relationship between interest rate and stock price: Empirical evidence from developed and developing countries. International Journal of Business and Management, 4(3), 43-51.

Maysami, R., Howe, L., & Hamzah, M. (2004). Relationship between macroeconomic variables and stock market indices: Cointegration evidence from stock exchange of Singapore’s all-S sector indices. Journal Pengurusan, 24(1), 47-77.

Mohammad, S., Hussain, A., Jalil, M., & Ali, A. (2009). Impact of macroeconomic variables on stock prices: Empirical evidence in case of KSE (Karachi Stock Exchange). European Journal of Scientific Research, 38(1), 96-103.

Mukherjee, T., & Naka, A. (1995). Dynamic relation between macroeconomic variables and the Japanese stock market: An application of a Vector Error Correction model. Journal of Financial Research, 18(2), 223-237. doi. 10.1111/j.1475-6803.1995.tb00563.x

Muktadir-al-Mukit, D. (2012). Effects of interest rate and exchange rate on volatility of market index at Dhaka stock exchange. Journal of Business and Technology, 7(2), 1-18.

Ouma, W.N., & Muriu, P. (2014). The impact of macroeconomic variables on stock market returns in Kenya. International Journal of Business and Commerce, 3(11), 1-31.

Pal, K., & Mittal, R. (2011). The impact of macroeconomic indicators on Indian capital markets. Journal of Risk Finance,12(2), 84-97. doi. 10.1108/15265941111112811

Prasad, A.M., & Rajan, M. (1995). The role of exchange and interest risk in equity valuation: A comparative study of international stock markets. Journal of Economics and Business, 47(5), 457-472. doi. 10.1016/0148-6195(95)00038-0

Rad, A.A. (2011). Macroeconomic variables & stock market: Evidence from Iran. International Journal of Economics and Finance Study, 3(1), 1-10.

Rafique, A., Amara, A., & Sultana, N. (2014). Impact of macroeconomic variables on stock market index (a case of Pakistan). Finance Management, 57, 14099-14104.

Rahman, A.A., Noor, Z.M.S., & Fauziah, H.T. (2009). Macroeconomic determinants of Malaysian stock market. African Journal of Business Management, 3(3), 95-106.

Ratanapakorn, O., & Sharma, S.C. (2007). Dynamic analysis between the US stock returns and the macroeconomic variables. Applied Financial Economics, 17(5), 369-377. doi. 10.1080/09603100600638944

Reddy, D.V.L. (2012). Impact of inflation and GDP on stock Market returns in India. International Journal of Advanced Research in Management and Social Sciences, 1(6), 120-136.

Singh, T., Mehta, S., & Varsha, M. (2011). Macroeconomic factors and stock return: Evidence from Taiwan. Journal of Economics and International Finance, 2(4), 217-227.

Sweeney , R.J., & Warga, A.D. (1986).The Pricing of Interest-Rate Risk: Evidence from the Stock Market. The Journal of Finance, 41(2), 393-410. doi. 10.1111/j.1540-6261.1986.tb05044.x

Talla, J. (2013). Impact of macroeconomic variables on the stock market prices of the Stockholm stock exchange (OMXS30).JÖNKÖPING UNIVERSITY: Sweden. Master of Science Thesis.

Uddin, M.G.S., & 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.

Ullah, F., Hussain, I., & Rauf, A. (2014). Impacts of macroeconomy on stock market: Evidence from Pakistan. International Journal of Management and Sustainability, 3(3), 140-146.

Wongbangpo, P. & Sharma, S. C. (2002). Stock market and macroeconomic fundamental dynamic interactions: ASEAN-5 countries. Journal of Asian Economics, 13(1) 27-51. doi. 10.1016/S1049-0078(01)00111-7




DOI: http://dx.doi.org/10.1453/jel.v5i1.1561

Refbacks

  • There are currently no refbacks.


.......................................................................................................................................................................................................................................................................................................................................

Journal of Economics Library - J. Econ. Lib. - JEL - www.kspjournals.org

ISSN: 2149-2379. Editor : editor-jel@kspjournals.org   Secretarial: secretarial@kspjournals.org   Istanbul - Turkey.

Copyright © KSP Journals