Relationship between stock prices and macroeconomic variables in selected Asian markets.
Sim, Hsien Hui.
Date of Issue2000
College of Business (Nanyang Business School)
This paper employs the Error-Correction Modeling using Hendry's (1986) General-to-Specific approach to examine the short and long run relationships between five macroeconomic variables and the stock returns of Singapore, Malaysia, Japan, Hong Kong, Thailand and South Korea. The macroeconomic variables analyzed include interest rate, inflation, money supply, exchange rate and real activity. A dummy variable is also included to capture the impact of the July 1997 Asian financial crisis on the various stock markets. The results confirm the existence of a short-term association between macroeconomic variables and the stock prices. Long run cointegrating relationships are also established between the variables and the equity markets studied. The type and magnitude of the relationships in different countries seem to differ depending on each country's financial structure. Accordingly, possible economic interpretations of the results based on the macroeconomic setting of the different countries are provided.
Nanyang Technological University