Impact of Macro Economics Factors in Share Market

19276 Words May 29th, 2011 78 Pages
1. INTRODUCTION

As an old adage goes, “When the US gets a Cold, the rest of the World gets Pneumonia”, in the globally open economy.

One reason for this might be that Stock Market depends on the overall health of the Economy, and real Economic variables which tend to display persistence. Therefore, an interesting question in finance is: what derives stock market volatility? Understanding the nature of stock market volatility gives some important implications for policy makers, economic forecasters and investors.

Studying the impact of MacroEconomic factors such as Inflation, Interest Rate, Dollar Value and FII on conditional stock market volatility also has important implications for investors and policymakers. In many
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Inflation is bound to impact all sectors, either directly or indirectly. Inflation and stock market have a very close association. If there is inflation, stock markets are the worst affected.

Relationship Between Inflation and the Stock Market

There is no one-to-one correlation between the Stock Market and Inflation. Typically, most investors stay away from the stock market when inflation goes up. This is because prices of shares along with the prices of everything else go up without any corresponding increase in intrinsic value. Such a bull phase soon leads to a market correction due to many investors deciding to realise profits.

Inflation and stock market- the logistics:

Prices of stocks are determined by the net earnings of a company. It depends on how much profit, the company is likely to make in the long run or the near future. If it is reckoned that a company is likely to do well in the years to come, the stock prices of the company will escalate. On the other hand, if it is observed from trends that the company may not do well in the long run, the stock prices will not be high. In other words, the price of stocks is directly proportional to the performance of the company. In the event when inflation increases, the company earnings (worth) will also subside. This will adversely affect the stock prices and eventually the returns.

Effect of inflation on stock market is also evident from the fact
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