Macroeconomic indicators and their impact on stock markets in ASIAN 3: A pooled mean group approach

Amith Vikram Megaravalli, Gabriele Sampagnaro
  • Cogent Economics & Finance, February 2018, Cogent
  • DOI: 10.1080/23322039.2018.1432450

Macroeconomic indicators and their impact on stock markets in ASIAN 3: A pooled mean group approach

What is it about?

The objective of this paper is to examine the long-run and the short-run relationship between India, China and Japanese stock markets and key macroeconomic variables such as exchange rates and inflation (proxied by consumer price index) of ASIAN 3 economies (India, China and Japan). Monthly time series data spanning the period from 2008 January to November 2016 has been used. The unit root test, the cointegration test, Granger causality test and pooled mean group estimator have been applied to derive the long-run and short-run statistical dynamics. The findings of pooled estimated results of ASIAN 3 countries show that exchange rate has a positive and significant long-run effect on stock markets while the inflation has a negative and insignificant long-run effect. In the short run, there is no statistically significant relationship between macroeconomic variables and stock markets. This study emphasises on the impact of macroeconomic variables on the stock market performance of a developing economy (India and China) and developed economy (Japan).

Why is it important?

Numerous studies have been done to investigate stock market linkages, integration or interdependence. The stock market is said to be integrated when correlation exists between markets. While the results of these studies are mixed, inconsistent and often oppose with each other, the ultimate determination behind the studies are the advantages of diversification. If evidence of stock market linkage were found, it would imply that there is a common force that brings these markets together. Hence, the benefit of diversification would be limited.


Amith Vikram Megaravalli (Author)
Universita degli Studi di Napoli Federico II

In emerging markets, many studies in the past have pointed out that stock markets represent the true portrait of an economy’s financial health. It is always being considered that macroeconomic events have a specific quantity of pressure on the stock markets. Therefore, every country produces several policies to facilitate foreign private capital flows in the form of portfolio investments. It is being noted that these investments would help the stock markets to widen their investor base and indirectly compelling local authorities to improve the trading system. While the volatility associated with portfolio capital flows is well known, in this context it is important for the investors to understand how the macroeconomic indicators affect the stock market to plan their investments.

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