Responsiveness of Stock Prices to Changes in Macroeconomic Environment in Bangladesh

Sarkar Humayun Kabir, Abu Taleb, Abdullah M. Noman, Sadia Shermeen

Abstract


This paper attempts to explore the long run relationship between stock
prices and selected macroeconomic variables in Bangladesh by applying the time
series analysis using monthly data from January 2001 to September 2010. We find a
single cointegrating relationship among stock price and other selected
macroeconomic variables. Analysis of the study also explores that stock prices and
call money rate are the endogenous variables and all others variables are
exogenous. Variance decomposition suggests that inflation rate is the leading
exogenous variable influencing the stock prices. In addition, call money rate is found
to be the leading endogenous variable. Above all, this study attempts to find the
causes behind the 2010 stock market collapse in Bangladesh by establishing a
relationship among the call money rate, stock prices, and bank lending to private
sector in Bangladesh.


Keywords


Stock prices, Call money rate, Bangladesh, Vector Error Correction Model (VECM), Variance Decomposition, Impulse Response Functions, Persistence Profile functions

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ISSN-1682-2498