Unveiling the Dynamics: Exploring the Relationship between Emerging Stock Market Prices and Macroeconomic Factors through ARDL Analysis

Year 2024, Volume: 16 Issue: 1, 24 - 49, 16.09.2024

Nihat Gümüş , Murtala Mustapha Baba

https://doi.org/10.33818/ier.1465359

Abstract

This study investigates the interaction between stock prices and prices in other markets using a panel ARDL model. Analyzing data from January 2004 to December 2022 for 19 emerging market countries, the study explores the impacts of gold prices, exchange rates, inflation rates, and interest rates on stock prices. The results indicate a long-term negative relationship, except for gold, between the variables. The effects are generally insignificant in the short run, except for gold's negative impact. The global financial crisis of 2008 negatively affected emerging market stock markets in both the short and long term. In the short run, the COVID-19 pandemic negatively impacted stock market returns, which turned positive in the long run. This study highlights the importance of sound monetary policies focused on price stability and fiscal policies aimed at reducing government dominance in financial markets to foster long-term growth in stock markets.

Keywords

Emerging stock markets, gold prices, exchange rate, inflation, interest rate, COVID-19

References

• Angrist, J. D., and J.S. Pischke (2008). Mostly Harmless Econometrics: An Empiricist's Companion. Princeton University Press.
• Ajlouni, M.M., W. Hmedat and W. Mehyaoui. (2012). The Impact of Global Financial Crisis 2008 on Amman Stock Exchange. Journal of Distribution Science, 10(7), 13–22.
• Akbar, M., F. Iqbal and F. Noor (2019). Bayesian analysis of dynamic linkages among gold price, stock prices, exchange rate, and interest rate in Pakistan. Resources Policy, 62, 154-164.
• Al-Ameer, M., W. Hammad, A. Ismail and A. Hamdan (2018). The Relationship of Gold Price with the Stock Market: The Case of Frankfurt Stock Exchange. International Journal of Energy Economics and Policy, 8(5), 357-371.
• Andrieș, A.M., I. Ihnatov and A.K. Tiwari (2014). Analyzing time–frequency relationship between interest rate, stock price, and exchange rate through continuous wavelet. Economic Modelling, 41, 227-238.
• Apergis, N., and S. Eleftheriou (2002). Interest rates, inflation, and stock prices: the case of the Athens Stock Exchange. Journal of Policy Modeling. (24), 231-236.
• Areli Bermudez Delgado, N., E. Bermudez Delgado and E. Saucedo (2018). The relationship between oil prices, the stock market, and the exchange rate: Evidence from Mexico. The North American Journal of Economics and Finance, 45, 266-275.
• Arfaoui, M. and A. Ben Rejeb (2017). Oil, gold, US dollar, and stock market interdependencies: a global analytical insight. European Journal of Management and Business Economics, 26(3), 278–293.
• Baur, D. G., and B. M. Lucey (2010). Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold. Financial Review, 45(2), 217-229.
• Beck, T., R. Levine and A. Levkov (2020). Financial innovation and stock market development. Journal of Financial Economics, 138(3), 646-664.
• Bekaert, G., and C.R. Harvey (2000). Foreign Speculators and Emerging Equity Markets. Journal of Finance, 55(2), 565-613.
• Blanchard, O., and S. Fischer (1989). Lectures on Macroeconomics. MIT Press.
• Bryman, A. and E. Bell (2015). Business Research Methods. 4th Edition, Oxford University Press, Oxford.
• Breitung, J., and S. Das (2005). Panel unit root tests under cross-sectional dependence. Statistica Neerlandica, 59(4), 414-433.
• Breusch, T. S., and A. R. Pagan (1980). The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics. The Review of Economic Studies, 47(1), 239-253.
• Brooks, C. (2019). Introductory Econometrics for Finance (4th ed.). Cambridge: Cambridge University Press. Caporale, G. M., W. Y. Kang, F. Spagnolo and N. Spagnolo (2022). The COVID-19 pandemic, policy responses, and stock markets in the G20. International Economics, 172, 77-90.
• Cassis, Y. (2010). Capitals of Capital: The Rise and Fall of International Financial Centres 1780-2009 (2nd ed.). Cambridge University Press. Chatrath, A., S. Ramchander and F. Song (1996). Stock Prices, Inflation, and Output: Evidence. Journal of Asian Economics, 7(2), 237-245.
• Celik, A, E. Nergiz and N. Akdag (2022). Korona virüs pandemisinin avrupa birliği borsalarina etkileri. Pamukkale University Journal of Social Sciences Institute. Advanced online publication.
• Chari, A., and P.B. Henry (2004). Risk Sharing and Asset Prices: Evidence from a Natural Experiment. Journal of Finance, 59(3), 1295-1324.
• Chen, N. F., R.Roll and S. A. Ross (1986). Economic Forces and the Stock Market. Journal of Business, 59(3), 383-403.
• Claessens, S., and B. B. Yurtoglu. (2013). Corporate Governance in Emerging Markets: A Survey. Emerging Markets Review, 15, 1-33.
• Creswell, J. W. (2014). Research Design: Qualitative, Quantitative, and Mixed Methods Approaches. Sage Publications.
• Dahir, A.M., F. Mahat, N. Hisyam, A. Razak, A. N. Bany-Ariffin (2018). Revisiting the dynamic relationship between exchange rates and stock prices in BRICS countries: A wavelet analysis. Borsa Istanbul Review, 18(2). 101-113.
• Demirgüç-Kunt, A., and R. Levine. (1996). Stock Market Development and Financial Intermediaries: Stylized Facts. World Bank Economic Review, 10(2), 291-321.
• Durai, S.R.S. and S.N. Bhaduri (2009). Stock prices, inflation, and output: Evidence from wavelet analysis. Economic Modelling, 26(5), 1089-1092.
• Durham, J.B. (2003). Foreign Portfolio Investment, Foreign Bank Lending, and Economic Growth. International Finance Discussion Papers, No. 757, Board of Governors of the Federal Reserve System.
• Edmondson, A.C. and S.E. McManus. (2007). Methodological Fit in Management Field Research. Academy of Management Review, 32(4), 1155-1179.
• Eisenhardt, K.M. (1989). Building Theories from Case Study Research. Academy of Management Review, 14(4), 532-550.
• Fama, E.F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance, 25(2), 383-417.
• Fama, E.F. (1981). Stock Returns, Real Activity, Inflation, and Money. American Economic Review, 71, 545–565.
• Fama, E.F. and K.R. French (1993). Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, 33(1), 3-56.
• He, J. (2006). Inflation and Stock Prices. Journal of Business & Economic Statistics, 24(2), 210-225. doi:10.1198/073500106000000160
• Henry, P. B. (2000). Do Stock Market Liberalizations Cause Investment Booms? Journal of Financial Economics, 58(1-2), 301-334.
• Hood, M. and F. Malik (2013). Is gold the best hedge and a safe haven under changing stock market volatility? Review of Financial Economics, 22(2), 47-52.
• Hoyos, R. E. D.,and V. Sarafidis, (2006). Testing for cross-sectional dependence in panel-data models. Stata Journal, 6(4), 482-496.
• Ibrahim, M.H. (2012). Financial market risk and gold investment in an emerging market: the case of Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 25-34.
• Iyke, B.N. and M.M.J.D. Maheepala (2022). "Conventional monetary policy, COVID-19 and stock markets in emerging economies," Pacific-Basin Finance Journal, Elsevier, 76(C).
• Jegadeesh, N. and S. Titman (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance, 48(1), 65-91.
• Kamal, J.B. and M. Wohar (2023). Heterogenous responses of stock markets to covid related news and sentiments: Evidence from the 1st year of pandemic. International Economics, 173, 68-85.
• Kasman, S., G. Vardar and G. Tunç (2011). The impact of interest rate and exchange rate volatility on banks' stock returns and volatility: Evidence from Turkey. Economic Modelling, 28(3), 1328-1334.
• Kim, E. H., and V. Singal. (2000). Stock Market Openings: Experience of Emerging Economies. Journal of Business, 73(1), 25-66.
• Lee, Y.M. and K.M. Wang (2015). Dynamic heterogeneous panel analysis of the correlation between stock prices and exchange rates. Economic Research-Ekonomska Istraživanja, 28(1), 749-772.
• Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 35(2), 688-726.
• Levine, R., and S. Zervos (1998). Stock markets, banks, and economic growth. American Economic Review, 88(3), 537-558.
• Liu, W., Y. Li and X. Lu (2021). Macroeconomic stability and stock market performance: Evidence from emerging economies. Emerging Markets Review, 46, 100748.
• Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77-91.
• Mishkin, F.S. and S.G. Eakins (2018). Financial Markets and Institutions, Global Ed. Pearson.
• MSCI (2022a). MSCI Index Country Membership Tool. Accessible at: https://www.msci.com/index-country-membership-tool
• MSCI (2022b). MSCI Index Calculation Methodology. Accessible at: https://www.msci.com/index/methodology/latest/IndexCalc
• Njiforti, P. (2015). Impact of the 2007-2008 Global Financial Crisis on the Stock Market in Nigeria. CBN Journal of Applied Statistics, 6(1)a, 49-68.
• Olugbenga, A.A. (2012). Exchange Rate Volatility and Stock Market Behaviour: The Nigerian Experience. Research Journal of Finance and Accounting, 3(3), 31-39.
• Oxman, J. (2012). Price inflation and stock returns. Economics Letters, 116(3), 385-388.
• Pandey, V. (2018). Volatility spillover from crude oil and gold to BRICS equity markets. Journal of Economic Studies, 45(2), 426–440. https://doi.org/10.1108/JES-01-2017-0025Rapach, D. E. (2002). The long-run relationship between inflation and real stock prices. Journal of Macroeconomics. (24), 331–351.
• Pesaran, M.H., Y. Shin, S. Storm (1999). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis in (ed.) Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, Chapter 11, Cambridge
• Pesaran, M. H. (2004a). General diagnostic tests for cross-sectional dependence in panels. CESifo Working Paper Series, No. 1229. CESifo Group Munich.
• Pesaran, M. H. (2004b). General diagnostic tests for cross-sectional dependence in panels. Cambridge Working Papers in Economics, 435. University of Cambridge, Faculty of Economics.
• Pesaran, M. H., A. Ullah and T. Yamagata (2008). A bias-adjusted LM test of error cross-section independence. The Econometrics Journal, 11(1), 105-127. doi:10.1111/j.1368-423X.2007.00227 Rajan, R.G., and L. Zingales (1998). Financial Dependence and Growth. American Economic Review, 88(3), 559-586.
• Rapach, D.E. (2002). The long-run relationship between inflation and real stock prices. Journal of Macroeconomics. (24), 331–351.
• Sahay, R., M. Čihák, P. N'Diaye and A. Barajas (2015). Rethinking Financial Deepening: Stability and Growth in Emerging Markets. IMF Staff Discussion Note, SDN/15/08.
• Sakthivel, P., K. Veera Kumar, G. Raghuram, K. Govindarajan and V. Vijay Anand (2014). Impact of Global Financial Crisis on Stock Market Volatility: Evidence from India. Asian Social Science, 10(10), 86-94.
• Sargent, T. J., and N. Wallace (1981). Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review, 5(3), 1-17.
• Schwert, G. W. (1990). Stock Returns and Real Activity: A Century of Evidence. Journal of Finance, 45(4), 1237-1257.
• Sekmen, F. (2011). Exchange rate volatility and stock returns for the US African, Journal of Business Management, 5(22), 9659-9664.
• Shleifer, A. and R.W. Vishny (1997). A Survey of Corporate Governance. Journal of Finance, 52(2), 737-783.
• Singh, N. P. and S. Sharma (2018). Phase-wise analysis of the dynamic relationship among gold, crude oil, US dollar, and the stock market. Journal of Advances in Management Research, 15(4), 480–499.
• Singhal, S., S. Choudhary and P. C. Biswal (2019). Return and volatility linkages among international crude oil price, gold price, exchange rate and stock markets: Evidence from Mexico. Resources Policy, 60, 255-261.
• Stock, J. H. and M.W. Watson (2003). Introduction to Econometrics. Boston, MA: Addison Wesley.
• Tetteh, J. E., A. Amoah, K. Ofori-Boateng and G. Hughes (2022). Stock market response to COVID-19 pandemic: A Comparative Evidence from Two Emerging Markets. Scientific African, 17, e01300.
• Tursoy, T. and F. Faisal (2018). The impact of gold and crude oil prices on the stock market in Turkey: Empirical evidence from ARDL bounds test and combined cointegration. Resources Policy, 55, 49-54.
• Valcarcel, V. J. (2012). The dynamic adjustments of stock prices to inflation disturbances. Journal of Economics and Business, 64(2), 117-144.
• Van Hoang, T.H., A. Lahiani and D. Heller (2016). Is Gold a Hedge Against Inflation? New Evidence from a Nonlinear ARDL Approach. Economic Modelling, 54, 54-66.
• Westerlund, J. (2007). Testing for Error Correction in Panel Data. Oxford Bulletin of Economics and Statistics, 69(6), 709-748.
• Wooldridge, J. M. (2015). Introductory Econometrics: A Modern Approach (6th ed.). Boston, MA: Cengage Learning