Socio-economy and stock market volatility
Keywords:Domestic Investment, Foreign Exchange Rate Volatility, Strike and Blockades, S & P 500 Index Volatility, VAR Model.
AbstractWe evaluate how stock market return volatility behaves with respect to socioeconomic factors namely- interest rate volatility, foreign exchange rate volatility, S &P 500 index volatility, broad money supply volatility, per capita GDP, domestic investment, industry value addition, tertiary level of education, urbanization, and strike and blockades using time series data from 1976-2015. We find that interest rate volatility has significant positive impact on stock market return volatility where broad money supply volatility, foreign exchange rate volatility, tertiary level of education, and domestic investment have significant negative impact on stock market volatility based on stepwise regression. Therefore, increase in tertiary level of education and domestic investment makes the stock market more stable. From the estimated result of VAR model, results show no short run causality among these variables.
Aliyu, S. U. R. (2012). Does Inflation have an Impact on Stock Returns and Volatility? Evidence from Nigeria and Ghana. Applied Financial Economics 22 (6), 427-435. https://doi.org/10.1080/09603107.2011.617691
Ashaolu, T. O. and M. S. Ogunmuyiwa (2011). An Econometric Analysis of the Impact of Macro Economic Variables on Stock market movement in Nigeria. Journal of Business Management 3(1), 72–78.
Borensztein, E., De Gregorio, J., and J. W. Lee (1998). How does FDI affect economic growth. Journal of International Economics 45(1), 115-135. https://doi.org/10.1016/S0022-1996(97)00033-0
Chinzara, Z. (2011). Macroeconomic Uncertainty and Conditional Stock Market Volatility in South Africa. South African Journal of Economics 79(1), 27-49. https://doi.org/10.1111/j.1813-6982.2011.01262.x
Chowdhury, S. S. H., and M. A. Rahman (2004). On the Empirical Relation between Macroeconomic Volatility and Stock Market Volatility in Bangladesh. The Global Journal of Finance and Economics 1(2), 209-225.
Davis, N., and A. M. Kutan (2003). Inflation and output as predictors of stock returns and volatility: international evidence. Applied Financial Economics 13, 693-700. https://doi.org/10.1080/09603100210139429
Engle, R. F., and J. G. Rangel (2005). The Spline GARCH Model for Unconditional Volatility and its Global Macroeconomic Causes. Czech National Bank, Research Department Working Papers 2005/13
Fama, E. F. (1981). Stock returns, real activity, inflation and money. American Economic Review 7(4), 545-565.
Fama, E. F., and G. W. Schwert (1977). Asset returns and inflation. Journal of Financial Economics 5(2), 115-146. https://doi.org/10.1016/0304-405X(77)90014-9
Johansen S. and K. Juselius (1990). Maximum likelihood estimation and inference on cointegration-with application to the demand for money. Oxford Bulletin of Economics and Statistics 52, 169-210. https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x
Kadir, H. B. A., Selamat, Z., Masuga, T., and R. Taudi (2011). Predictability Power of Interest Rate and Exchange Rate Volatility on Stock Market Return and Volatility: Evidence from Bursa Malaysia. International Conference on Economics and Finance Research IPEDR, Vol.4, Singapore.
Krishnamurti, C., Sequeira, J. M., and F. Fangjian (2003). Stock exchange governance and market quality. Journal of Banking and Finance 27(9), 1859-1878. https://doi.org/10.1016/S0378-4266(03)00105-5
Liljeblom, E., and M. Stenius (1997). Macroeconomic Volatility and Stock Market Volatility: Empirical Evidence on Finnish Data. Applied Financial Economics 7, 419-426. https://doi.org/10.1080/096031097333538
Morelli, D. (2002). The Relationship between Conditional Stock Market Volatility and Conditional Macroeconomic Volatility Empirical Evidence Based on UK Data. International Review of Financial Analysis 11, 101-110. https://doi.org/10.1016/S1057-5219(01)00066-7
Okoli, M. N. (2012). X-Raying the Impact of Domestic and Global Factors on Stock Return Volatility in the Nigerian Stock Market. European Scientific Journal 8 (12), 235-250.
Oseni, I. O., and P. I. Nwosa (2011). Stock Market Volatility and Macroeconomic Variables Volatility in Nigeria: An Exponential GARCH Approach. Journal of Economic and Sustainable Development 2(10), 43-53.
Pesaran, H. M. and B. Pesaran (1997). Microfit 4.0, Oxford University Press: Oxford.
Pesaran, M. H. and Y. Shin (1999). An autoregressive distributed lag modelling approach to cointegration analysis, Econometrics and
Economic Theory in the 20th Century: the Ragnar Frisch Centennial Symposium, Cambridge University Press: Cambridge.
Pesaran, M.H., Shin, Y. and R.J. Smith (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics 16, 289-326. https://doi.org/10.1002/jae.616
Schwert, W. G. (1989). Why does stock market volatility change over time? Journal of Finance 44, 1368–1388. https://doi.org/10.1111/j.1540-6261.1989.tb02647.x
Wei, Y. (2005). The Development of the Securities Market and Regulation in China. The Loyola of Los Angeles International and Comparative Law Review (ILR) 27(3), 479-514.
Yaya, O. S. and O. I. Shittu (2010). On the Impact of Inflation and Exchange Rate on Conditional Stock Market Volatility: A Reassessment. American Journal of Scientific and Industrial Research 1 (2), 115-117. https://doi.org/10.5251/ajsir.2010.1.2.115.117
Zakaria, Z. and S. Shamsuddin (2012). Empirical Evidence on the Relationship between Stock Market Volatility and Macroeconomics Volatility in Malaysia. Journal of Business Studies Quarterly, 4 (2), 61-71.
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) after official publication, as it can lead to productive exchanges as well as greater citation of published work (See The Effect of Open Access).