Macroeconomic Variables Of The Stock Market

974 WordsOct 30, 20144 Pages
Executive Summary The belief of macroeconomic variables influencing the stock market has been a highly debated discussion for the past decades. There has been no clear conclusion whether or not macroeconomic variables impact the stock market or inversely. The importance of this study have been increasingly critical as not only stock agents find the critical importance but the government to implement macroeconomic policy; the solid finding of this relation will enable policy makers to efficiently and effectively control the economy as well as the capital market. We aim to cover some relationship between macroeconomic indicators, including consumption, interest rate unemployment rate and inflation rate, and with stock price. Stock price or…show more content…
As a result, the correlation between consumption growth and stock returns is higher than average due to the high total wealth. Consequently, it is possible to see a positive correlation between the consumption and stock return (Li and Zhong 2010) Stock price or return and interest rate The interest rate controlled by the Federal Reserve has a significant role in influencing the consumers’ and firms’ consumption and investment behaviors. This as a result indirectly affects the stock market. McCue and Kling (1994) claimed that US the fluctuation in the nominal interest rate has affected approximately 36% or higher in terms of the fluctuation real asset returns. Assuming rationality, this is because a decrease in interest rates to investors will decrease opportunities to make income from investments. The model that best supports the correlation between stock return and interest rate is the capital asset pricing model as shown in appendix A (Hoe 2002, p. 140). The interest rate is embedded in Beta which captures the systematic risks; also, higher interest rate means a higher beta, which ultimately increases the expected return of the asset. However, as Beta increases the risk of these asset increases and rational agents will have to be rewarded for having an asset with higher systematic risk. Stock price or return and
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