바로가기메뉴

본문 바로가기 주메뉴 바로가기

logo

ISSN : 2765-6934

Article Contents

Prev Next
e-Submission

Vol.11 No.4

Citation Share

Dynamic Interaction between Conditional Stock Market Volatility and Macroeconomic Uncertainty of Bangladesh

Asian Journal of Business Environment / Asian Journal of Business Environment, (P)2765-6934; (E)2765-7027
2021, v.11 no.4, pp.17-29
Mostafa ALI (University of Chittagong)
Md. Ali Arshad CHOWDHURY (University of Chittagong)
Mostafa, A. , & Md., A. A. C. (2021). Dynamic Interaction between Conditional Stock Market Volatility and Macroeconomic Uncertainty of Bangladesh. Asian Journal of Business Environment, 11(4), 17-29.

Abstract

Purpose: The aim of this study is to explore the dynamic linkage between conditional stock market volatility and macroeconomic uncertainty of Bangladesh. Research design, data, and methodology: This study uses monthly data covering the time period from January 2005 to December 2018. A comprehensive set of macroeconomic variables, namely industrial production index (IP), consumer price index (CPI), broad money supply (M2), 91-day treasury bill rate (TB), treasury bond yield (GB), exchange rate (EX), inflow of foreign remittance (RT) and stock market index of DSEX are used for analysis. Symmetric and asymmetric univariate GARCH family of models and multivariate VAR model, along with block exogeneity and impulse response functions, are implemented on conditional volatility series to discover the possible interactions and causal relations between macroeconomic forces and stock return. Results: The analysis of the study exhibits time-varying volatility and volatility persistence in all the variables of interest. Moreover, the asymmetric effect is found significant in the stock return and most of the growth series of macroeconomic fundamentals. Results from the multivariate VAR model indicate that only short-term interest rate significantly influence the stock market volatility, while conditional stock return volatility is significant in explaining the volatility of industrial production, inflation, and treasury bill rate. Conclusion: The findings suggest an increasing interdependence between the money market and equity market as well as the macroeconomic fundamentals of Bangladesh.

keywords
Stock Market Volatility, Macroeconomic Environment and Uncertainty, GARCH Family of Models, Bangladesh

Reference

1.

Abugri, B. A. (2008). Empirical relationship between macroeconomic volatility and stock returns: Evidence from Latin American markets. International Review of Financial Analysis, 17, 396-410.

2.

Adjasi, C. K. D. (2009). Macroeconomic uncertainty and conditional stock-price volatility in frontier African Markets: Evidence from Ghana. The Journal of Risk Finance, 10(4), 333-349.

3.

Asteriou, D., & Hall, S. G. (2011). Applied Econometrics (2nd ed.). New York, USA: Palgrave MacMillan.

4.

Awijen, H., Zaied, Y. B., Nguyen, D. C., & Sensoy, A. (2020). Endogenous financial uncertainty and macroeconomic volatility: Evidence from the United States (MPRA Paper No. 101276). Retrieved September 23, 2020, from https://mpra.ub.uni-muenchen.de/101276/

5.

Bilson, C. M., Brailsforf, T. J., & Hooper, V. J. (2001). Selecting macroeconomic variables as explanatory factors of emerging stock market returns. Pacific-Basin Finance Journal, 9(4), 401-426.

6.

Black, F. (1976). Studies of stock price volatility changes. Proceedings of the 1976 Meetings of the Business and Economical Statistics Section, American Statistical Association (pp. 177-181). Washington DC, USA: American Statistical Association.

7.

Bollerslev, T., Chou, R. Y., & Kroner, R. F. (1992). ARCH modelling in Finance: A review of the theory and empirical evidence. Journal of Econometrics, 52(1-2), 5-59.

8.

Bollerslev, T., Engle, R. F., & Nelson, D. B. (1994). Handbook of econometrics, volume IV. In R. F. Engle & D. L. McFadden (Eds.), ARCH Models (pp. 2959-3038), Amsterdam, Holland: Elsevier Science.

9.

Brooks, C. (2008). Introductory Econometrics for Finance (2nd ed.). Cambridge, UK: Cambridge University Press.

10.

Bui, T. T. (2015). Asymmetric effect of monetary policy on stock market volatility in ASEAN5. Eurasian Journal of Business and Economics 2015, 8(15), 185-197.

11.

Cai, W., Chen, J., Hong, J., & Jiang, F. (2017). Forecasting Chinese stock market volatility with economic variables. Emerging Markets Finance & Trade, 53, 521-533.

12.

Chen, N., Roll, R., & Ross, S. A. (1986). Economic forces and the stock market. Journal of Business, 59, 383-403.

13.

Chinzara, Z. (2011). Macroeconomic uncertainty and conditional stock market volatility in South Africa. South African Journal of Economics, 79(1), 27-49.

14.

Choo, W.-C., Lee, S.-N., & Ung, S.-N. (2011). Macroeconomic uncertainty and performance of GARCH models in forecasting Japan stock market volatility. International Journal of Business and Social Science, 2(1), 200-208.

15.

Chowdhury, S. S. H., Mollik, A. T., & Akhter, M. S. (2006). Does predicted macroeconomic volatility influence stock market volatility? Evidence from the Bangladesh capital market (Working paper). Retrieved February 22, 2020, from https://www.researchgate.net/profile/Shah_Saeed_Chowdhury/publication/241062364_Does_Predicted_Macroeconomic_Volatility_Influence_Stock_Market_Volatility_Evidence_from_the_Bangladesh_Capital_Market/links/543fb97b0cf2be1758cf6cce/Does-Predicted-Macroeconomic-Volatility-Influence-Stock-Market-Volatility-Evidence-from-the-Bangladesh-Capital-Market.pdf

16.

Corradi, V., Distaso, W., & Mele, A. (2013). Macroeconomic determinants of stock volatility and volatility premiums. Journal of Monetary Economics, 60, 203-220.

17.

Cutler, D. M., Poterba, J. M., & Summers, L. H. (1989). What moves stock prices? Journal of Portfolio Management, 15, 4-12.

18.

Daly, K. (2008). Financial volatility: Issues and measuring techniques. Physica A, 387, 2377-2393.

19.

Davis, N., & Kutan, A. M. (2003). Inflation and output as predictors of stock returns and volatility: International evidence. Applied Financial Economics, 13, 693-700.

20.

Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49, 1057-1072.

21.

Engle, R. F., Ghysels, E., & Sohn, B. (2013). Stock market volatility and macroeconomic fundamentals. The Review of Economics and Statistics, 95(3), 776-797.

22.

Erdem, C., Arslan, C. K., & Erdem, M. S. (2005). Effects of macroeconomic variables on Istanbul stock exchange indexes. Applied Financial Economics, 15(14), 987-994.

23.

Fraser, P., & Power, D. M. (1997). Stock return volatility and information: an empirical analysis of Pacific Rim, UK and US equity markets. Applied Financial Economics, 7, 241-253.

24.

Groenewold, N., & Fraser, P. (1997). Share price and macroeconomic factors. Journal of Business, Finance and Accounting, 24(10), 1367-1383.

25.

Imam, M. O., & Amin, A. S. M. M. (2004). Volatility in the stock return: Evidence from Dhaka stock exchange. Journal of the Institute of Bankers Bangladesh, 51(1), 1-28.

26.

Jain, A., & Biswal, P. C. (2016). Dynamic linkages among oil price, gold price, exchange rate, and stock market in India. Resource Policy, 49, 179-185.

27.

Joarder, M. A. M., Ahmed, M. U., Haque, T., & Hasanuzzaman, S.(2014). An empirical testing of informational efficiency in Bangladesh capital market. Economic Change and Change Restructuring, 47, 63-87.

28.

Kasman, S., Vardar, G., & Tunc, G. (2011). The impact of interest rate and exchange rate volatility on banks’ stock returns and volatility: Evidence from Turkey. Economic Modelling, 28, 1328-1334.

29.

Kocaarslan, B., Sari, R., Gormus, A., & Soytas, U. (2017). Dynamic correlations between BRIC and U.S. stock markets: The asymmetric impact of volatility expectations in oil, gold and financial markets. Journal of Commodity Markets, 7, 41- 56.

30.

Kumari, J., & Mahakud, J. (2015). Relationship between conditional volatility of domestic macroeconomic factors and conditional stock market volatility: Some further evidence from India. Asia-Pacific Financial Markets, 22, 87-111.

31.

Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of trend stationanity. Journal of Econometrics, 54, 159-178.

32.

Leigh, L. (1997, January). Stock market equilibrium and macroeconomic fundamentals (IMF Working Paper No. WP/97/15). Retrieved March 23, 2020, from https://www.imf.org/external/pubs/ft/wp/wp9715.pdf

33.

Liljeblom, E., & Stenius, M. (1997). Macroeconomic volatility and stock market volatility: Empirical evidence on Finnish data. Applied Financial Economics, 7, 419-426.

34.

Martens, M., & Dijk, D. (2007). Measuring volatility with the realized range. Journal of Econometrics, 138, 181-207.

35.

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.

36.

Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59(2), 347-370.

37.

Nikmanesh, L. & Nor, A. H. S. M. (2016). Macroeconomic determinants of stock market volatility: An empirical study of Malaysia and Indonesia. Asian Academy of Management Journal, 21(1), 161-180.

38.

Olweny, T. O., & Kimani, D. (2011). Stock market performance and economic growth Empirical Evidence from Kenya using Causality Test Approach. Advances in Management & Applied Economics, 11(3), 153-196.

39.

Oseni, I. O., & Nwosa, P. I. (2011). Stock market volatility and macroeconomic variables volatility in Nigeria: An exponential GARCH approach. European Journal of Business and Management, 3(12), 43-53.

40.

Paye, B. S. (2012). ‘Deja Vol’: Predictive regressions for aggregate stock market volatility using macroeconomic variables. Journal of Financial Economics, 106, 527-546.

41.

Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.

42.

Poon, S. H., & Granger, C. W. (2003). Forecasting volatility in financial markets: A review. Journal of Economic Literature, 41(2), 478-539.

43.

Roll, R. (1988). R2. Journal of Finance, 43, 541-566.

44.

Schwert, G. W. (1989). Why does stock market volatility change over time? Journal of Finance, 44, 1115-1153.

45.

Shang, Y., & Zheng, T. (2021). Mixed-frequency SV model for stock volatility and macroeconomics. Economic Modelling, 95, 462-472.

46.

Sims, C. (1980). Macroeconomics and reality. Econometrica, 48, 1-48.

47.

Tokmakcioglu, K., & Tas, O. (2014). Stock market and macroeconomic volatility comparison: An US approach. Quality & Quantity, 48, 217-224.

48.

Tsay, R. S. (2005). Analysis of Financial Time Series (2nd ed.). New York, USA: Wiley-Interscience.

49.

Zakaria, Z., & Shamsuddin, S. (2012). Empirical evidence on the relationship between stock market volatility and Macroeconomic volatility in Malaysia. Journal of Business Studies Quarterly, 4(2), 61-71.

50.

Zakoian, J. M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and Control, 18, 931-955.

51.

Zivot, E., & Wang, J. (2006). Modelling Financial Time Series with S-PLUS® (2nd ed.). New York, USA: Springer-Verlag New York Inc.

Asian Journal of Business Environment

e-Submission OA Policy