Investigating the relationship between stock market returns and macroeconomic variables: evidence from developed and emerging markets

This study examines the links between the macroeconomic variables (real economic activity, inflation, interest rate, money supply and exchange rate) and stock prices for developed and emerging markets during the period of January 2002 to December 2008. The study uses various testing methods including Granger causality test and Pedroni panel cointegration tests. These tests were applied by using panel data from 16 developed markets and 16 emerging markets. The empirical results show a significant causal relationship between macroeconomic variables, with the exception of interest rate and money supply, and stock prices for developed and emerging markets. It also finds a significant causal relationship between stock prices and macroeconomic variables for developed and emerging markets with the exception of exchange rate and money supply for developed markets. The findings also show a positive long-run relationship between real economic activity level and stock prices for developed markets. Furthermore, the results find that the relationship between macroeconomic variables and stock return in emerging markets is significantly more established than in developed markets.