Scribd
Upload
43 views2 pages

How Macroeconomic Variables Affect The Stock Market

This document discusses how various macroeconomic variables can affect stock market performance. It examines factors like consumption, oil prices, interest rates, inflation, industrial production, and how they correlate with stock market returns in both the short and long term. The effects of these variables can differ between countries and time periods.

Uploaded by

dimitratsa30
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
43 views2 pages

How Macroeconomic Variables Affect The Stock Market

This document discusses how various macroeconomic variables can affect stock market performance. It examines factors like consumption, oil prices, interest rates, inflation, industrial production, and how they correlate with stock market returns in both the short and long term. The effects of these variables can differ between countries and time periods.

Uploaded by

dimitratsa30
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

How macroeconomic variables affect the stock market

1.Introduction
This review aims to study and examine the subject of the correlation between
macroeconomic indicators and stock market fluctuations, contrasting and comparing
different information sources to achieve a good understanding of the subject. Extensive
literature investigates the reactions of the investors-market behavior & key economic
factors, with the help of appropriately formulated keywords and phrases. The sources used
were closely examined in order to select those most relevant , unbiased and have been sited
several times. This review firstly examines the different variables that can influence stock
performance and afterwards test some examples on how these variables affected stock
markets.
For many years there has been a keen interest in examining these factors that can
affect stock behavior in order to construct a series of strategies that may predict reliably
stock market returns. Stock markets tend to reflect the aggregate economy relatively well
and therefore some macroeconomic factors are presumably inclined to affect an investors
future outcomes.

2.Variables
The economic situation of a company affects its value in the market, and in the same
manner the firms that are listed in a stock market will be affected from the global financial
situation and even more from the situation in the specific country( Amado Peiró,2015). The
performance of the stock market is influenced by various macroeconomic factors,
consequently, analyzing their impact is essential for both investors and industries, as it can
affect their sustainability and directly influence stock market prices ( (Mukherjee and Atsuyuki,
1995; Agrawalla and Tuteja, 2008).

Consumption plays a significant role in trading activity. As people consume they get
used to this relatively higher level of consumption, become less risk averse and invest in the
stock market, creating a bubble. When the person cannot afford the same level of
consumption, they become a lot more risk averse, than when the consumption level was
rising creating a situation of excess volatility and decreased prices ( John H. Cochrane, 2017).
Zhenxi Chena , Donald Lienb , Yaheng Linc (2020) support these finds through their research
stating that increase in consumer sentiment leads to a rise in both the capital ratio and stock
prices, indicating that higher consumer confidence boosts firm investment and supports the
stock market. However, after some time, we notice that stock returns shift from positive to
negative.
According to Rudra P. Pradhan, Mak B. Arvin , Atanu Ghoshray (2015), oil prices as a
non renewable sources of energy effect economic growth. They found that there is an
equilibrium connection between economic growth, stock market depth and oil prices, suggesting
that rising oil prices leas to economic and stock market growth. Oil prices have different effects
on stock market for importing and exporting countries For exporting countries the effects are
positive and for importing the opposite (Rakesh Kumar Verma, Rohit Bansal, 2019)
Rakesh Kumar Verma, and d Rohit Bansal (2019), also fount a positive but low
correlation between
Román Ferrer , Vicente J. Bolós and Rafael Benítez (2016), studied the correlation of
stock returns and rate exchanges. They studied the yields of 10 year bonds and stock market
indices of 10 European countries. They found that strength of this connection s varies from
country to country and also differs widely over time and across investment horizons. UK stock
prices tend to follow rate exchanges really closely, with the only exception of shorter investment
horizons. countries, including Germany, France, the Netherlands and Finland also display a
significant linkage, especially in periods of financial crisis. On the other hand for countries like
Portugal, Ireland and Greece there is a lack of connection between these two factors.
Although in previous years it was considered that industrial production effects stock
indices, according to (Erfan M. Bhuiyana, Murshed Chowdhury, 2011) who performed a study on the
United States and Canada, revealed that the correlation between industrial production stock
indices is insignificant in serve-based economies. Industrial production influences mostly
manufacturing based economies like China and Japan.
As reported by Silvio John Camilleria, Nicolanne Sciclunaa , Ye Bai (2019) inflation may
have the ability to positively impact the demand of stocks due to the effect inflation has on the real value
of assets . Stocks are usually used as a from of hedge against inflation. Supported by their
study, inflation is one of the variables that had the strongest link with stock market activity
across most European countries. This study supports the theory that higher inflation may
encourage policy makers to raise interest rates which then decrease stock prices.

You might also like