Impact of Macroeconomic Factors on Stock Exchange Prices: Evidence from USA Japan and China (original) (raw)

2013, Thema Working Papers

Study Objectives: the objective of this study is to investigate the long run as well as relationship between macroeconomic indicators of term of trade, oil prices, rate of interest, money supply (M3), index of industrial production and stock exchange prices indices in the context of USA Japan and China with particular attention to the recent global financial recession. This study also will seek to examine that whether the same model can explain USA, Japanese and Chinese stock markets, while yielding consistent factors loading. Research Methodology: We use monthly time series data of the respective variables of the range 2005-1 to 2010-5. ARDL co-integration approach used for data analysis. Results: The results show that in USA and China, in long run (LR) as well as short run (SR) rate of interest, industrial production index and Money supply (M3) are positively related to the stock exchange prices. The results of Japan shows that rate of interest is positively and highly significantly in LR but in SR, at first lag it has positive but at second lag has negative relation with stock exchange prices. For Japan data, in LR industrial production index has positive and insignificant relation with stock exchange prices and in SR, at first lag it has positive but at second lag has negative relation stock exchange prices. For Japan, money supply (m3) in LR has positive but in SR has negative and significant relation with stock exchange prices. In all three economies USA, Japan and China, in long run term of trade (TOT) has positive relation with stock prices. But in USA and Japan, in sort run TOT is negatively related with stock exchange prices. For China's data, in short run TOT is positively related with stock prices. In all three economies, in long run oil prices are negatively related to the stock exchange prices but in short run, in USA oil prices have positive relation, in Japan oil prices have negatively related and in China at first lag it has positive but at second lag has negative relation with stock exchange prices. This study shows that the long run model, can explain USA, Chinese stock markets, yielding consistent factors loading, but not Japan's stock market. But the short run model, cannot explain USA, Japan and Chinese stock markets, yielding consistent factors loading. An explanation of the difference in behavior between the three stock markets may lie as USA economy is most affected by financial crises, 2007 and Japanese economy slump after 1990, china is least affected economy by financial crises, 2007. Research Assumptions/Limitations: The movement in stock exchange is an important indicator of an economy process and a clear understanding of stock exchange determinants is very important for investors, national policy makers, corporate managers and researchers. In this study we will use only five explanatory variables for the analysis of the behavior of the stock exchange returns but there are also many other factors which can influence the share prices thus future researches will be required to widely explore this issue. This study will use the data of the range 2005-1 to 2010-5 so there is possibility that it does not cover all fluctuations of the stock markets of the said countries. Originality/value: In the context of recent global financial recession no study has so far been traced which explains the causal relationship between macroeconomic variables and stock markets of USA, Japan and China and this study empirically examined long run as well as short run relation among stock markets and macroeconomic factors in largest economies of the world i.e., USA, Japan and China during recent global financial crisis period so this study will contribute in body of knowledge and will be very helpful for the investors, national policy makers and corporate managers etc.