Impact of Macro Economics Factors in Share Market

Topics: Inflation, Stock market, Central bank Pages: 94 (19263 words) Published: May 16, 2011

As an old adage goes, “When the US gets a Cold, the rest of the World gets Pneumonia”, in the globally open economy.

One reason for this might be that Stock Market depends on the overall health of the Economy, and real Economic variables which tend to display persistence. Therefore, an interesting question in finance is: what derives stock market volatility? Understanding the nature of stock market volatility gives some important implications for policy makers, economic forecasters and investors.

Studying the impact of MacroEconomic factors such as Inflation, Interest Rate, Dollar Value and FII on conditional stock market volatility also has important implications for investors and policymakers. In many ways the performance of the economy influences the success of the stock market and vice versa. Irving Fisher found that real interest rates were equal to nominal interest rates minus expected inflation. This MacroEconomic relationship is known as the Fisher Effect (Mankiw, 1997). So, the understanding of impact of Fisher effect on stock market index through stock volatility can broaden our understanding of such risks allowing it to be priced more efficiently.

The relationship between Microeconomic variables and Share Price Movement has dominated both academician's and practitioner’s literature in recent times. It is believed that government financial policy and Microeconomic event have large influence on general economic activities in an economy including the Stock Market. This motivates many researchers to investigate the dynamic relationship between Share Price Movement and Microeconomic variables.

Preliminary research has been done using different approaches to investigate such relationship between Share Price Movement of Particular Sector and Microeconomic variables. This has been necessitated by the general perception, that Microeconomic fundamentals such as Inflation, Dollar Value, FII, Call Money Rate and Interest Rate influence economic activities especially stock returns. “A significant research has been done to investigate the relationship between Share Price Movement and a range of Microeconomic variables, across a number of different stock market and over a range of different time horizon”. For example, Modigliani and Cohn (1979) reported in their study of the interaction between stock return and inflation that expected stock returns should equal the current earnings yield on stocks (defined as earnings over price) plus an inflation premium.

Mayasami and Koh (2000) examined dynamic relationship among Stock Prices and Macroeconomic variables and report the sensitivity of Singapore stock market to interest rate and exchange rate. Similarly, Humpe and Macmillan (2007) examine the influence of a number of Macroeconomic variables on stock prices in two countries, the US and Japan. They report evidence of positive influence of industrial production on both stock markets and US stock market positively influence by inflation and long interest rate.


To conduct this study, Five MacroEconomic factors were chosen and their definition and impact in Share Market as follows,



The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index, Wholesale Price Index, and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a Currency Value is going to fall because a person won't be able to purchase as much with that Currency as he/she previously could.

Inflation is a state in the economy of a country, when there is a price rise of goods as well as services. To meet the required price rise, individuals have to shell out more than is presumed. With increase in...

References: 1. Kothari.C.R. (1978), ‘Research Methodology’, Vikas Publishing House Pvt Ltd, New Delhi.
3. Davis, Nicolas and Kutan, Ali, M., 2003, Inflation and output as predictors of stock returns and volatility: International evidence, Applied Financial Economics
5. Fang,H and J.Loo (1994) Dollar value and stock returns. International review of economics and finance.
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