Macroeconomic Determinants of Nepalese Stock Market (original) (raw)

2023, Academic Journal of DAMC

This study examines the influence of macroeconomic variables on the Nepalese stock market by employing an econometric model. Monthly data from mid-July 2001 to mid-July 2020 is analyzed to explore long- and short-term relationships. The study considers macroeconomic variables such as broad money (M2), the USD to NPR exchange rate (EXR), the consumer price index as a proxy for inflation (INF), and the T-Bill 91 days as a proxy for the interest rate (INT).The NEPSE index (NEPIN) is used as the dependent variable. The unit root test results reveal that only the interest rate variable is stationary or integrated at levels I (0), while the other variables are stationary at the first difference I(1)). Given this mixed integration, the autoregressive distributive lag (ARDL) model is employed to determine the short-run and long-run relationships between macroeconomic variables and stock market development. The findings from the ARDL bound test confirm the presence of a long-run relationship between macroeconomic variables and stock market development. In the long run, there is a significant negative relationship between money supply and stock market development. However, the other variables do not exhibit sufficient statistical evidence to be considered significant. In the short run, both the money supply and the USD NPR exchange rate show a negative and significant relationship with stock market development. On the other hand, inflation and the interest rate display statistically insignificant relationships with stock market development. Additionally, the study finds that the error correction term or co-integrating equation is negative and significant at the 1 percent level of significance. However, the adjustment process towards long-run equilibrium has a low speed of 2.76%. This indicates that deviations from the short-run equilibrium are corrected gradually, with only 2.76% of the disequilibrium being adjusted each month following a shock. As a result, it would take a considerable amount of time to return to long-run equilibrium. In conclusion, this study demonstrates the impact of macroeconomic variables on the Nepalese stock market. Money supply is identified as a significant factor affecting stock market development in the long run. However, the relationships in the short run are more nuanced, with money supply and the USD to NPR exchange rate exerting negative effects while inflation and the interest rate show little statistical significance. The slow adjustment process toward long-run equilibrium highlights the need for careful monitoring and timely policy adjustments to maintain market stability.