Volatility Nexus Between Stock Market and Macroeconomic Variables in Bangladesh

What is it about?

This paper examines the volatility of the Bangladesh stock market returns in response to the volatility of the macroeconomic variables employing monthly data of general index of Dhaka Stock Exchange (DSE) and four macroeconomic variables (Call Money Rate, Crude Oil Price, Exchange Rate and SENSEX of Bombay Stock Exchange) from January 2001 to December 2015. The results of GARCHS models reveal that the volatility of DSE return is significantly guided by the volatility of macroeconomic variables, such as, exchange rate and SENSEX. Specifically, volatility of the DSE is expected to 19% increase by 1% increase of exchange rate. Moreover, the volatility of the Bangladesh stock market returns is expected to dampen down by 2% with an increase in the volatility of Indian stock market of 1%. Thus, we can comment that adding exchange rate or stock returns of India in the GARCH model provides significant knowledge about the behaviour of the DSE volatility.

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Why is it important?

The stock market strongly influences the economic growth in Bangladesh. Thus, stock market might be one of the leading driving forces of country's economy and prerequisite for development as Bangladesh aspires to be a high-income country by 2041. However, this expected pace of development should not be hindered owing to any false movements in the stock market. Thus, the policymakers of Bangladesh should have sound knowledge about the reasons of stock market volatility and the stock market should be handled with care such that crashes like 1996 and 2011 will not be repeated. Motivated by the importance of this matter, this research is to investigate the volatility of stock market returns in response to the volatility of the macroeconomic variables.