The Relationship between Macroeconomic Variables and Stock Market Returns : A Case of Jordan for the Period

Transcription

1 Inernaional Journal of Business and Social Science The Relaionship beween Macroeconomic Variables and Sock Marke Reurns : A Case of Jordan for he Period Abdul Nafea Al-Zararee Philadelphia Universiy Faculy of Adminisraive and Financial Sciences Jordan Izz Eddien N. Ananzeh Philadelphia Universiy Faculy of Adminisraive and Financial Sciences Jordan Absrac The aim of his sudy is o invesigae he relaionship beween macroeconomic facors on Amman Sock Marke Exchange(ASE) Reurns, by employing quarerly daa beween (1993:3and 2013:9). This sudy uses six macroeconomic facors:real money supply RM2 (MS), real gross domesic produc (RGDP), weighed average ineres raes on loans and advances (WAIR), Jordanian Worker's Remiances (WRMIT), Inernal public loan (IPL), Consumer Prıce Index (CPI).The normaliy es and uni roo ess applied o he daa. Also, ARCH /GARCH models uilized. The resuls reveal ha ou of he six macroeconomic variables employed money supply, Inernal public loan, weighed average ineres raes on loans and advances, Jordanian Worker's Remiances and Consumer Prıce Index exer srong significan influence on sock reurns. Consumer Prıce Index and Jordanian Worker's Remiances have a posiive significan impac, while Real money supply, real gross domesic produc, weighed average ineres raes on loans and Inernal public loan have a negaive significan impac. On he oher hand, real gross domesic produc exer no significan influence on sock reurns in Jordan. Keywords: Macroeconomic Variables, ARCH,GARCH 1. Inroducion A number of researchers have invesigaed he impac of macroeconomic variables on sock Reurns over he las few decades ( Fama, 1981; Friedman, 1988; Ke ran, 1971, Nelson,1976,ec). Number of he aricle has been exensivelly sudied in developed capial markes dae back o 1970s. Ineres in his area is mainly because sock marke has been recognized o have a prominen role macroeconomic developmen. in a counry s Theoreically, sock marke should be closely relaed wih he macroeconomic variables of he counry, simply because sock prices are he discouned presen value of expeced fuure cash flows. Based on a simple discoun model, he fundamenal value of a corporae sock is equal o he presen value of expeced fuure dividends, hus he fuure dividend mus evenually reflec he real economy aciviy. Similarly, he volailiy of sock prices should also depend on he volailiy of expeced fuure cash flows and fuure discoun raes. Since he value of corporae equiy a he aggregae level depend on he sae of economic aciviy, i is likely ha any changes in he level of uncerainy of fuure macroeconomic condiions would cause a change in sock reurn volailiy. In oher words, sock markes may be volaile simply because real economic aciviies flucuae. Zakaria, Shamsuddin (2012). The aack on he conclusions drawn from he Efficien Marke Hypohesis (EMH) includes early sudies by Fama and Schwer (1977) affirming ha macroeconomic variables influence sock reurns. The relaionship has been examined in Emerging Sock Markes afer 1980s (Menike 2006). However,ineres in invesing in emerging markes has grown considerably over he pas decade. Harvey (1995a) shows ha reurns and risks in emerging sock markes have been found o be higher, relaive o developed markes. 186

2 Cener for Promoing Ideas, USA All he researchs done in order o idenify he relaion beween macroeconomic variables and sock reurn, The esimaion of fuure rends of macroeconomic variables can be helpful in seeing he leading direcion of sock reurns. I is ofen believed ha he sock reurn is deermined by a number of fundamenal macroeconomic variables such as ineres rae, indusrial producion,money supply, inflaion rae, and a good number of sudies have capured he effecs of macroeconomic variables on sock reurns for differen counries. Exising heories offer differen models ha make available framework for examining he relaionship beween sock reurn and macroeconomic variables (Quadir, 2012). However, ineres in invesing in emerging markes has grown considerably over he pas decade. Harvey (1995a) shows ha reurns and risks in emerging sock markes have been found o be higher, relaive o developed markes. This sudy analyzes he relaionship beween sex macroeconomic facors on sock marke reurns of Amman Sock Exchange (ASE) from he ime period of 1993:3 o 2013:9. The res of his paper is organized as follows: secion 2 reviews several previous sudies on he relaionship beween sock marke and macroeconomic variable; secion 3 provides a mehodology used in his sudy and daa; in Secion 4, he empirical resuls are presened; and followed by he conclusion in Secion Lieraure Review The relaionship beween sock marke price and macroeconomic variables has been sudied exensively especially in he case of developed economies, several sudies also have been execued for emerging markes, and he lieraure daes back o he lae 1970s. Nelson (1976) examined he relaionship beween monhly sock reurns and inflaion from 1953 o 1974 using US daa, and he found a negaive relaionship beween sock reurns, in boh expeced and unexpeced inflaion. Fama (1981, 1982), Fama and Schwer (1977), Geske and Roll (1983) empirically find ha sock reurns are negaively affeced by boh expeced and unexpeced inflaion. Chen e al. (1986) used some macroeconomic variables o explain sock reurns in he US sock markes, founded ha he se of macroeconomic variables which can significanly explain sock reurns includes growh in indusrial producion, changes in he risk premium, wiss in he yield curve, while boh he anicipaed and unanicipaed inflaion raes were negaively relaed o he expeced sock reurns. Lee (1992) found ha sock reurns assis o explain he real economic aciviy; however, sock reurns demonsrae lile abou he variaion in inflaion, hrough analyzed he causal relaionships and dynamic ineracions among asse reurns, real economic aciviy, and inflaion in he poswar US using a VAR approach. Maysami and Koh (2000) inspec he relaions beween macroeconomic variables (exchange rae, long and shor erm ineres raes, inflaion, money supply, domesic expors, and indusrial producion) and Singapore sock markes using he vecor error correcion model which covered he period from 1988 o 1995.They found ha inflaion, money supply growh, changes in shor- and long-erm ineres rae and variaions in exchange rae formed a coinegraing relaion wih changes in Singapore s sock marke levels. Maghyereh (2002) invesigaed he long-run relaionship beween he Jordanian sock prices and seleced macroeconomic variables, by using monhly ime series daa for (January 1987 o December 2000). The resuls indicae ha macroeconomic variables reflec in sock prices in he Jordanian capial marke. Islam & Waanapalachaikul (2003) presen a srong, significan long-run relaionship beween sock prices and macroeconomic facors (ineres rae, bonds price, foreign exchange rae, price-earning raio, marke capialisaion and consumer price index) during in Thailand. Gan, Lee, Yong and Zhang (2006) findings sugges ha here exis a long erm relaionship beween sock prices and macroeconomic variables in New Zealand. However, he Granger causaliy es suggess ha New Zealand sock exchange is no a good indicaor for macroeconomic variables in New Zealand, his resul however, is inconsisen wih oher sudies. More recenly, Wang (2011) inspec he ime-series relaionship beween sock marke volailiy and macroeconomic variable volailiy for China using E-GARCH and lag-augmened VAR models. 187

3 Inernaional Journal of Business and Social Science He found evidence on he exisence of a bilaeral relaionship beween inflaion and sock prices, and a unidirecional relaionship beween he ineres rae and sock prices. Chinzara (2011) examine he relaionship beween macroeconomic uncerainy and sock marke volailiy for Souh Africa and found ha sock marke volailiy is significanly affeced by macroeconomic uncerainy. I's worh o menion ha he previous sudies referred o did no includes he variable inernal public loan as a facor effec on sock marke reurn especially in our counry Jordan, so ha our sudy is differen from he previous sudies in is mehodology as well as i deal wih new facor ha may be effec on sock marke reurns. 3. Daa and Research Mehodology 3.1 Daa Source The empirical analysis is carried ou by using quarerly daa. The sample period spans from March 1993 o Sep 2013, and he sudy was carried ou by using76 quarerly observaions, he ime series daa for sudy were sourced from Cenral Bank of Jordan (CBJ), Saisical Bullein. Macroeconomic daa used in his sudy includes; Amman Sock Marke Reurns(ASMR), Consumer Price Index (CPI), money Supply M2(MS),Weighed Average Ineres Raes on Loans and Advances (WAIR), Gross Domesic Produc A Curren Prices( RGDP), Workers Remiances (WRMIT), Inernal Public Loan (IPL). Amman Sock Marke Reurns (SMR) represens he dependen variable while he oher variables are he independen one. 3.2 Macroeconomic Variables Definiions This secion provides a simple descripion of he variables used in he model, which is used in he empirical invesigaion of he relaionship beween sock reurns and macroeconomic variables Amman Sock Marke Reurns (ASMR) Amman Sock Exchange (ASE), All Share Index was used as a proxy for Amman sock marke reurns (ASMR), he all share index is a broad marke indicaor of he sock marke, which measures he overall performance of he sock marke and was specified as he dependen variable. The quarerly rae of reurn of real General Price Indices of Amman sock exchange a he curren quar is calculaed by he following formula: QIR Ln P / P ) 188 ( 1 Where QIR is a Quarerly Index Reurns, P is he general price index for he quar, P 1 is he general price index for he quar Consumer Price Index (CPI) Measures he general price level of a fixed baske of goods and services consumed by he Jordanian family (851 commodiies and services), including hose impored from abroad. I is prepared by he Deparmen of Saisics and weighed by he average family expendiure on goods and services, acquired from he resuls of Household Expendiure and Income Survey carried ou in Inflaion is being capured be consumer price index. Rising inflaion increases he cos of living and shifs resources from invesmens o consumpion. This brings abou a fall in demand for securiies, which in reurn leads o reducion in he volume of sock raded. Also he moneary policy responds o he increase in he rae of inflaion in he absence of flexible producion sysem o respond o he reques of money supply, which in urn increases he nominal risk free rae and hence, raises he discoun rae which resuls in reducion of presen value of cash flows so i is said ha an increase in inflaion is negaively relaed o sock prices. CPI : is he quar-end of consumer price index. CPI Ln( CPI / CPI 1), QCPI quarerly growh rae of consumer price index, Ln : is he naural logarihm Money Supply M2 (MS) Money Supply is used as a proxy of money supply. Increase in money supply leads o increase in liquidiy ha in he end resuls in upward movemen of nominal sock prices. MS : is he quar-end of real money supply (M2) broad definiion.

4 Cener for Promoing Ideas, USA QMS Ln( MS / MS 1), QMS quarerly growh rae of real money supply, Ln : is he naural logarihm Weighed Average Ineres Raes on Loans and Advances (WAIR) WAIR : is he quar-end of weighed average ineres rae on loans and advances. QWAIR Ln( WAIR / WAIR 1), QWAIR quarerly growh rae of weighed average ineres rae on loans and advances, Ln : is he naural logarihm. According o he convenional model he higher ineres rae lead o a decline in sock prices, and vice versa, as long as he ineres rae is he discoun rae ha is used o calculae he curren of he marke reurn. The ineres rae affec he marke reurn because i represen an alernaive for invesor o in inves his money Gross Domesic Produc a Curren Prices (RGDP) RGDP : is he quar-end of gross domesic produc. QRGDP Ln( RGDP / RGDP 1 ), QRGDP quarerly growh rae of gross domesic produc, Ln : is he naural logarihm. The GDP could have a posiive or a negaive impac, in he case of he unexpeced increase of his variable will lead o increased opimism abou he fuure which increase he volume of he share and as a resul an increase in he marke reurn, bu if led he projec increase he rae of inflaion and ineres rae increases rae of required rae of reurn on invesmen all of ha adversely affec marke reurn Workers Remiances (WRMIT) WRMIT : is he quar-end of workers remiances. QWRMIT Ln( WRMIT / WRMIT 1), QIPL quarerly growh rae of workers remiances, Ln : is he naural logarihm. Is expeced o resul in increased WRMIT o increase he volume of invesmen, is also expeced o from par of hese ransfers will go o inves in financial marke, lead o increase demand for sock and as a resul an increase in he marke reurn Inernal Public Loan (IPL) IPL : is he quar-end of inernal public loan. QIPL Ln( IPL / IPL 1 ), QRGDP quarerly growh rae of inernal public loan, Ln : is he naural logarihm. When he expeced increase in IPL by issuing more governmen bonds wih invesmen free or lile risk wih a good reurn. i will lead o he absorpion of he he invesmens oward his variable which effec negaively on he marke reurn, his is logical explanaion for a negaive relaionship beween he wo variables. 3.3 Mehodolgy Augmened Dickey Fuller (Dickey and Fuller, 1979) es is applied o examine he saionary of a daa ha is ime series in naure. The numbers of lags were decided in reference o he Akaike Informaion Crierion o eliminae residual auocorrelaion in he quarerly daa. Augmened Dickey Fuller saionary echnique is applied wih having differencing a firs level o conver daa in saionary. As he daa is ime series in naure Y Y p 1 j Y j (1) j 1 Where β is he coefficien on a ime rend, α is a consan and p he lag order of he auoregressive process. There is many sudies used he Auoregressive Condiional Heeroskedasiciy (ARCH) model, and has now become widely used in modeling he behavior of financial ime series. One of he main advanages of ARCH models is is abiliy o capure he non- lineariy and volailiy clusering in sock reurn daa. 189

5 Inernaional Journal of Business and Social Science Also, ARCH models sudy he second momen (Condiional and non-condiional) of he ime series, and hus allow he variance of a series o depend on he available informaion se. This model was laer exended by Engle and Bollerslev (1986) o he Generalized Auoregressive Condiional Heeroskedasiciy (GARCH) model which incorporaes he lagged values of condiional variance and herefore is able o capure he lepokurosis, skewness, and volailiy clusering in he ime series daa. The GARCH mehodology also akes ino accoun pas variances in explaining fuure variances, and herefore when he daa suffers from heeroscedasiciy, he expeced value of he error erm is no consan. Furhermore, all ARCH/GARCH models explain he imporance of he degree of persisence of shocks o volailiy in reurns and macroeconomic variables. These models are also useful in examining he simulaneous ineracion among sock marke reurns and variaion in macroeconomic facors. Invesigaion of condiional variance model on Sock markes behavior is recenly examined by a large number of sudied. Auoregressive condiional Heeroscedasiciy (ARCH) model, is employed o examine ime varying risk. Model s mean equaion is shown by an AR (p) process. The lagged value of he squared error erm ha is obained from he mean equaion and he condiional variance is regressed on consan. The reurn series is regressed on is pas values. The esimaion of a GARCH model involves he join esimaion of a mean and a condiional variance equaion. The GARCH (1,1) model is saed as follows: Y k 0 i i 1 2 Y u u ~ N(0, ) (2) i q i 1 2 i p 2 u (3) i j 1 i 2 j The esimaion of GARCH model involves he join esimaion of a mean and condiional variance equaion. Equaion (2), he condiional mean equaion, is an auoregressive process of order k (AR(k)). Parameer 0 is he consan, k is he lag lengh, u is he heeroskedasic error erm wih is condiional variance. Equaion (3) is he condiional variance equaion specified as he GARCH (p,q) model where p is he number of ARCH erms, and q is he number of GARCH erms. Several lieraure shows ha (for insance, sudy by Baillie and DeGennaro, 1990; Bera and Higgins, 1993; Floros, 2009, among ohers), a simple GARCH model is parsimonious and generally gives significan resuls. Therefore, his paper will use GARCH(1,1) models o o invesigae he impac of macroeconomic facors on Amman Sock Marke Reurns (ASMR), hese macroeconomic variables are (Consumer Price Index (CPI), money Supply M2(MS),Weighed Average Ineres Raes on Loans and Advances (WAIR), Gross Domesic Produc A Curren Prices( RGDP), Workers Remiances (WRMIT), Inernal Public Loan (IPL).) being sudied. 4. Empirical Resuls Firsly we are looking o he relaionship beween he rae of reurn of he (ASE) index and seleced macroeconomic variables have been examined hrough various descripive saisics analysis, and in order o es he saionariy of he variables by using he Augmened Dickey Fuller es. Table (1) describe he saisical daa, also he probabiliies (p-values) are used in order o provide evidence wheher o rejec he null hypohesis of he normaliy for he uncondiional disribuion of he quarerly rae of reurn. 190

6 Cener for Promoing Ideas, USA Table (1) Descripive saisics for Amman sock marke reurns ASMR CPI MS WAIR WRMIT RGDP IPL Mean Median Maximum Minimum Sd. Dev Skewness Kurosis Jarque-bera Probabiliy Observaions Table 1 resuls show ha he variables are normally disribued and highly skewed, including he Amman sock price index (ASE) which is significanly skewed o he righ and has an excess kurosis (deviaed from 3), and he series are lepokuric. While, MS,WAIR,WRMIT, and IPL are skewed o he lef. High levels of kurosis he normaliy es is applied hrough using he Jarque-Bera es, and based on he sample kurosis and skewness. Based on he Jarque-Bera saisics and p-values, his assumpion is rejeced a 1% significan level. Subsequenly, We can sae ha here is no randomness in he daa. Table 2. Ljung-box Q-saisics for Amman sock marke reurns LAG AC PAC Q-Sa Prob Table (2) confirms hrough using he Ljung-Box Q-saisics associaed wih he ACF coefficiens of he raw sock marke reurns and, his rejecs he null hypohesis of no auocorrelaion up o one-fourh of he years.this may be seen as evidence for he presence of ARCH effec or volailiy clusering, which can be inerpreed as a sign of long-range dependence in Amman sock marke reurns during he sample period. This reveals ha sock reurns are no normally disribued (Mandelbro, 1963 and Fama, 1965). Table (3).The Resuls of Uni Roo Tes for (ASMR &Macroeconomic Variables) Variables ADF Uni Roo Tes PP Uni Roo Tes Akaike Informaion Crierion (AIC) Durbin- Wason Sa ASMR * * CPI * * MS * * RGDP * * IPL * * WAIR * * WRMIT * * Uni roo es and Augmened Dickey Fuller es Variables a firs difference in naural logarihm wihou Inercep and Trend. 191

7 Inernaional Journal of Business and Social Science Noes: 1. Aserisk (*) shows he rejecion of he null hypohesis of non-saionary a he 1% level. 2. MacKinnon (1996) criical values are used for ADF and PP ess (A firs difference in naural logarihm wihou Inercep and Trend). The 1%, 5% & 10% criical value for he ADF and PP ess is and and respecively. Table (3) show he resuls of uni roo ess hrough ADF, and PP. The null hypohesis of he exisence of a uni roo are lying in he rejecion of he null area and herefore is rejeced a 1% significance level in boh he ADF and PP ess, since he es saisics are more negaive han he calculaed criical values. Moreover, he Durbin- Wason saisics indicaes here is no evidence of auocorrelaion in all series. From all he above resuls all of he daa series are saionary, we can now coninue o esimae he influence of macroeconomic facors on Amman sock marke reurn, hrough employing he ARCH/GARCH models. In lieraure many sudies examined he relaionship beween sock marke prices and many macroeconomic facors and show a mixure of findings. The findings of hese sudies depend on he exen of hese sudies. So ha, we can' generalize he oucomes because of he differen marke environmen & background. Every marke possesses differen rules, regulaions, invesors, and oher feaures. Wih regards o his sudy; all variables indicae ha hey are saionary, lending coninuiy in he modeling process. Therefore, he influence of macroeconomic facors on he (ASMR) is esimaed uilizing ARCH/GARCH esimaion model. Table (4) The effec of macroeconomic variables on Amman Sock Marke Reurn is examined by Mehod: ML ARCH (1)/ GARCH (1) esimaion for he period: (1993:3-2013:9 ). Dependen Variable: SMR Dependen Variable: ASMR Mehod: ML - ARCH Dae: 01/10/14 Time: 18:22 Sample: 1993:3 2012:9 Included observaions: 79 Convergence no achieved afer 500 ieraions Coefficien Sd. Error z-saisic Prob. C MS IBL CPI WRMIT WAIR RGDP Variance Equaion C ARCH(1) GARCH(1) R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regression Akaike info crierion Sum squared resid 1.34E+08 Schwarz crierion Log likelihood F-saisic Durbin-Wason sa Prob(F-saisic) 0 192

8 Cener for Promoing Ideas, USA The esimaed resuls, using ARCH/ GARCH were performed. The value relaed o he lagged squared error erm is posiive & significan a 1% level, which saisfies he specificaion requiremen of he model. On he oher hand, GARCH (1, 1) which incorporaes he coefficien of he lagged variance erm is found o be negaive, and saisically significan. Therefore, he exension of GARCH (1, 1) seems necessary. However, he resuls of his sudy based on he GARCH (1,1) esimaion as showed in able (5) indicae ha money supply (MS) has an inverse impac on he ASMR.The negaive value of he coefficien is ( ) and significan & consisen wih, Fama (1981) and Jensen e. al ( 1996), Mukherjee and Naka (1995), Maysami and Koh (2000) and, Wongbangpo and Sharma (2002), and inernal public loan (IBL) has an inverse impac also on he ASMR.The negaive value of he coefficien is ( ) and significan. Our findings also confirmed a significan posiive relaion beween he ASMR and CPI, his is inconsisen wih Chen e al (1986), Mukherjee & Naka (1995). Our finding suppor a significan posiive relaion beween he ASMR and WRMIT. Our sudy indicaes a significan inverse relaionship beween ineres raes (WAIR), and ASMR. However, he resul is consisen wih Choi& Jen (1991), Maysami & Koh (2000), Al-Sharkas (2004), Kandir (2008). The resuls show also a negaive impac of RGDP on he ASMR and he coefficien is ( ) and highly insignifican. This is an opposie wih he sudies of Geske and Roll (1983), Chen, Roll and Ross (1986), Fama (1990), Kearney and Daly (1998), and Maysami & Koh (2000) Maghayereh (2002),Al-Sharkas (2004). The sum of he ARCH and GARCH coefficiens is less han one, which reveals ha he uncondiional variance is saionary. Since he sum of is averagely close o one, he ime-varying volailiy of he Amman sock marke reurns is moderaely persisen. In oher words, a shock o he Amman sock marke volailiy will no las oo long. Tha is, here is a mean revering variance process. The is larger han, which implies ha he volailiy of he sock marke is affeced by economic news more han he pas volailiy. 5. Summary and Conclusions This sudy esed he relaionship beween six macroeconomic facors and he marke reurn in Amman Sock Exchange for he period 1993:3-2013:9 hrough GARCH es model o esimae he relaionship beween marke reurn and a range of imporan economic variable ha explain and jusify he behavior of sock reurn. Based on he esimaion model adoped in his sudy show ha one of he six macroeconomic variables ha were seleced for analysis on basis of GARCH-mean equaion, money supply, Consumer Prıce Index, Inernal public loan, weighed average ineres raes on loans and advances and Jordanian Worker's Remiances exer srong significan influence on sock reurns while real gross domesic produc exer no significan influence on sock reurns in Jordan. The significan impac of he esimaed coefficien, 1 of he ime varying condiional variance indicaes ha volailiy exer a negaive impac on Amman sock marke reurns in he period under review. Tha is, here seems o be evidence of a GARCH-in-mean effec in he model. However, he evidence on he volailiy of he condiional variance. On he GARCH-variance equaion, he volailiy of he Amman sock marke is affeced by economic news more han he pas volailiy. The se of macroeconomic variables were used in his sudy, may be Some oher macroeconomic variables would provide more informaion abou he sock reurns volailiy. This sudy also suggess some fuure sudies ha incorporae oher macroeconomic variables oher han he ones used in his sudy o enhance he undersanding abou he dynamics of he sock marke reurns in less developed counries. 193

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