Impact of Macroeconomic Variability on the Stock Market Volatility of Bangladesh

Year 2021, Volume: 3 Issue: 2, 66 - 86, 30.04.2021

Mostafa Ali

https://doi.org/10.47103/bilturk.837413

Abstract

This study investigates the impact of macroeconomic variability on stock market volatility in Bangladesh covering the data ranging from January 2005 to December 2018 by using three steps of analysis. Firstly, the univariate Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model is employed to estimate the time-varying conditional variance series for stock return and macroeconomic fundamentals. In the second phase, the volatility effect of macroeconomic forces on stock return is estimated by using the most recent standardized squared residuals of macroeconomic fundamentals as exogenous variables in the conditional variance equation of stock returns. Finally, Vector Auto Regression (VAR) model is used to examine the possible interaction between macroeconomic forces and stock price. The findings of the study evidence that increased volatility in Consumer Price Index, Treasury Bill Rates, and inflow in Foreign Remittance increases the stock return volatility whilst fluctuations in IP leads to a decrease in stock return volatility. Therefore, the implication of these findings documents that both the stock market and macroeconomic forces becoming interdependent in Bangladesh.

Keywords

Macroeconomic variability, Stock market volatility, EGARCH model, VAR model, Bangladesh

References

• Abbas, G., Hammoudeh, S., Shahzad, S. J. H., Wang, S., & Wei, Y. (2019.) Return and volatility connectedness between stock markets and macroeconomic factors in the G-7 countries. Journal of Systems Science and Systems Engineering, 28, 1–36.
• Adjasi, C. K. D. (2009). Macroeconomic uncertainty and conditional stock-price volatility in frontier African Markets: Evidence from Ghana. The Journal of Risk Finance, 10(4), 333-349.
• Aliyu, S. U. R. (2012). Does inflation have an impact on stock returns and volatility? Evidence from Nigeria and Ghana. Applied Financial Economics, 22, 427-435.
• Asgharian, H., Hou, A. J., & Javed, F. (2013). The importance of the macroeconomic variables in forecasting stock return variance: A GARCH-MIDAS approach. Journal of Forecasting, 32, 600-612.
• Baroian, E. (2014). Can macroeconomic volatility affect stock market volatility? The case of 5 central and eastern European countries. Romanian Journal of Fiscal Policy, 5(2), 41-55.
• Beetsma, R., & Giuliodori, M. (2012). The changing macroeconomic response to stock market volatility shocks. Journal of Macroeconomics. 34(2), 281-293.
• Berndt, E., Hall, B., Hall, R., & Hausman, J. (1974). Estimation and inference in nonlinear structural models. Annals of Social Measurement, 3, 653-665.
• Bollerslev, T., & Wooldridge, J. M. (1992). Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances. Econometric Reviews, 11(2), 143-172.
• Chen, N., Roll, R., & Ross, S. A. (1986). Economic forces and the stock market. Journal of Business, 59, 383-403.
• Chen, J., Xiong, X., Zhu, J., & Zhu, X. ( 2017). Asset prices and economic fluctuations: the Implications of stochastic volatility. Economic Modelling, 64, 128–140.
• Chowdhury, S. S. H., & Rahman, M. A. (2004). On the empirical relation between macroeconomic volatility and stock market volatility of Bangladesh. The Global Journal of Finance and Economics, 1(2), 209-225.
• Corradi, V., Distaso, W., & Mele, A. (2013). Macroeconomic determinants of stock volatility and volatility premiums. Journal of Monetary Economics, 60, 203-220.
• Cutler, D. M., Poterba, J. M., & Summers, L. H. (1989). What moves stock prices? Journal of Portfolio Management, 15, 4-12.
• Dayıoğlu, T., & Aydın, Y. (2019). Relationship between the Volatility of Stock Returns and the Volatility of Macroeconomic Variables: A Case of Turkey. American Journal of Theoretical and Applied Business. 5 (2), 40-46.
• Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49, 1057-1072.
• Erdem, C., Arslan, C. K., & Erdem, M. S. (2005). Effects of macroeconomic variables on Istanbul stock exchange indexes. Applied Financial Economics, 15(14), 987-994.
• Fama, E. F. (1981). Stock returns, real activity, inflation, and money. American Economic Review, 71(4), 545-565.
• Fama, E. F. (1990). Stock returns, expected returns and real activity. Journal of Finance, 45(4), 1089-1108.
• Fernando, A. (2018). Macroeconomic Impact on Stock Market Returns and Volatility: Evidence from Sri Lanka. Business and Economics Journal, 9(4),1-15. doi:10.4172/2151-6219.1000379
• Garza-Garcia, J. G., & Yue, Y. (2010). International determinants of stock market performance in China: A cointegration approach. Working Paper Series (ISSN 2041-1596), Paper Number: 03/10, Centre for Global Finance, Bristol Business School, University of the West of England.
• Hamao, Y., Masulis, R. W., & Ng, V. (1990). Correlations in price changes and volatility across international stock markets, Review of Financial Studies, 3, 281-307.
• Hsing, Y. (2011). Impacts of Macroeconomic Variables on the Stock Market in Bulgaria and Policy Implications. Journal of Economics and Business, 14, 2, 41-53.
• Hsing, Y., & Hsieh, W. (2012). Impacts of macroeconomic variables on the stock market index in Poland: new evidence. Journal of Business Economics and Management, 13(2), 334-343.
• Jain, A., & Biswal, P. C. (2016). Dynamic linkages among oil price, gold price, exchange rate, and stock market in India. Resource Policy, 49, 179-185.
• Kabir, S. H., Bashar, O. K. M. R., & Masih, M. M. (2014). Is domestic stock price cointegrated with exchange rate and foreign stock price? Evidence from Malaysia. The Journal of Developing Areas, 48 (3), 285-302.
• Kan, Y. Y. & Lim, G. C. (2015). Structural break and cointegration in Malaysian stock market. International Proceedings of Economics Development and Research, 84, 25-42.
• Kanas, A., & Kouretas, G. (2001). Volatility spillovers between black market and official markets for foreign currency in Greece, Journal of Financial Research, 24, 443-461.
• Karim, B. A., Sea, L. P., & Karim, Z. A. (2014). The impact of macroeconomic volatility on the Indonesian stock market volatility. International Journal of Business and Technopreneurship, 4(3), 467-476.
• Kumari, J., & Mahakud, J. (2015). Relationship between conditional volatility of domestic macroeconomic factors and conditional stock market volatility: Some further evidence from India. Asia-Pacific Financial Markets, 22, 87-111.
• Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of trend stationanity. Journal of Econometrics, 54, 159-178.
• Mazuruse, P. (2014). Canonical correlation analysis: Macroeconomic variables versus stock returns. Journal of Financial Economic Policy, 6(2), 179-196.
• Mittnik, S., Robinzonov, N., & Spindler, M. (2015). Stock market volatility: Identifying major drivers and nature of their impact. Journal of Banking and Finance, 58, 1-14.
• Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica 59(2), 347-370.
• Nikmanesh, L. & Nor, A. H. S. M. (2016). Macroeconomic determinants of stock market volatility: An empirical study of Malaysia and Indonesia. Asian Academy of Management Journal, 21(1), 161-180.
• Park, S. Y., Ryu, D. & Song, J. (2017). The dynamic conditional relationship between stock market returns and implied volatility. Physica A, 482, 638-648.
• Paye, B. S. (2012). ‘Deja Vol’: Predictive regressions for aggregate stock market volatility using macroeconomic variables. Journal of Financial Economics, 106, 527-546.
• Roll, R. (1988). R2. Journal of Finance, 43, 541-566. Schwert, G. W. (1989). Why does stock market volatility change over time? Journal of Finance, 44, 1115-1153.
• Sims, C. (1980). Macroeconomics and reality. Econometrica, 48, 1-48.
• Susmel, R., & Engle, R. F. (1994). Hourly volatility spillovers between international equity markets, Journal of International Money and Finance, 13(1), 3-25.
• Tangjitprom, N. (2012). The review of macroeconomic factors and stock returns. International Business Research, 5(8), 107-115.
• Tokmakcioglu, K., & Tas, O. (2014). Stock market and macroeconomic volatility comparison: An US approach. Quality and Quantity, 48, 217-224.
• Zakaria, Z., & Shamsuddin, S. (2012). Empirical evidence on the relationship between stock market volatility and Macroeconomic volatility in Malaysia. Journal of Business Studies Quarterly, 4(2), 61-71.