THE RELATIONSHIP BETWEEN INFLATION AND STOCK MARKET: EVIDENCE FROM MALAYSIA, UNITED STATES AND CHINA.
Inflation rate is one of the factors that will influence the volatility and risk of stock market. Inflation is categorized into two categories which are expected inflation and unexpected inflation. Expected inflation defines that there was a plan which created by the economics and consumers year by year. It is less of people holding the cash over time to avoid the condition of depreciation value of money. While, unexpected inflation is dependent on the estimation of the economic and consumers. In general, unexpected inflation brings more harmful effect than expected inflation. The major effect of unexpected inflation is a redistribution of
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Macroeconomic factors, like Gross Domestic Product, exchange rate, interest rate, inflation rate, money supply, economic crisis and economic liberalization affects the stock market returns in Malaysia. Stock market is critically important to our economy as it channels funds and capital from those who have excess to firms, corporations or individual that can use them more effectively. Several analysis were used to determine the accurate stock market returns and their relationships with the macroeconomic determinants in Malaysia. Precise information about the stock market returns volatility is crucial for decision making by firm from different industry to understand deeper about how Malaysia stock market works to be able to build the right strategy in handling their funds and creating better management portfolio and financial plans. Leverage effects, which stated that negative news and announcements brings bigger volume of shocks to stock market compared to positive news, causing volatility in stock market was found to be exist in Malaysia stock market. Several analysis such as dynamic stock returns volatility estimation, Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH), generalized least squares (GLS) regressions and Random effects (Feasible Generalized Least Squares) …show more content…
For example, money supply and interest rate influenced stock price positively, while inflation influenced stock price negatively. Macroeconomic variables are considered good indicators for predicting and assuming the stock market direction and stock price other than financial variables. It is believed that macroeconomic factors which are publicly available can be used to make investment decisions and past information can be utilized to predict the stock market returns. Macroeconomic variables are important especially to fundamental investors to forecast future trends of stocks in order to make good investment. Macroeconomic variable such as inflation will affect the stock price due to the fact that inflation announcement often reduce the stock price and decrease the discount rate causing the value of the company to reduce, Monetary policy will also affects the stock market as it act as liquidity indicator and economic activity. Changes of money supply will also influence the stock price as higher money supply is related with higher interest rate. Reduced interest rate will lower borrowing cost for investment and loan, thus increasing the investment in stock market and increase the stock price. Exchange rate is also determined to be a macroeconomic variable that will cause stock market
UK economy goes through difference series of pattern with booms to slumps. Every business does well in the time period of boom and most businesses collapse in the time period of slump or recession. Other economy changes that have influence on ASDA are interest rate, wage rate and inflation rate.
For example, if the cost of the consumer basket rises, say, from $100 in 2007 to $102 in 2008, the average annual rate of inflation for 2008 is 2 per cent. People generally believed that if the inflation rate was higher than normal in the past so they will expect it to be higher in the future than anticipated whereas some takes in consideration the past along with current economic indicators, such as the current inflation rate and current economic policies, to anticipate its future performance. Over the long term, the earnings margins of corporations are inflationary and so are the wage gains of workers. According to rational expectations, attempts to reduce unemployment will only result in higher inflation. To fully appreciate theories of expectations, it is helpful to review the difference between real and nominal concepts. Anything that is nominal is a stated aspect. In contrast, anything that is real has been adjusted for inflation. To make the distinction clearer, consider this example. Suppose you are opening a savings account at a bank that promises a 5% interest rate. This is the nominal, or stated, interest
Economic indicators often affect and influence the value of a country's currency. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, and Business Inventories are examples of economic indicators. We will be dealing with four specific indicators: interest rate, inflation, unemployment, and employment growth, as well as Real Gross Domestic Product (GDP). Real GDP is so called because the effects of inflation and depreciation are accounted for in the figures. The state of the economy is important both on a micro and macroeconomic level.
The adaptive expectations theory assumes people form their expectations on future inflation on the basis of previous and present inflation rates and only gradually change their expectations as experience unfolds. In this theory, there is a short-run tradeoff between inflation and unemployment which does not exist in the long-run. Any attempt to reduce the unemployment rate blow the natural rate sets in motion forces which destabilize the Phillips Curve and shift it rightward.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
This article by Andrew McCathie posted in EarthTimes and titled “European inflation climbs unemployment at 12-year high was posted on Friday July 30 2010. The article reports that food and energy costs have played a critical role in driving up inflation in the 16-member eurozone. The rates of unemployment remained stagnant to its highest level during this time.
Author provides some numbers, for the reader to find out about the situation in other companies. This article is totally related to the business, because it deals with the information, useful for the businessmen for decision making. The overview of the economical situation in the stock market is very useful for those people, whose businesses are closely connected to investments and gambling. Business can be strongly affected by the article, because the fed company can lose its potential investors and the gamblers can have a chance to avoid unnecessary loss. As a result the other companies can get more investors, and the investors more profit, but only in case, the author’s predictions are true. So, the article can generally decrease the number of gamblers involved into stock market in the nearest future.
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
...economic variables for emerging economies. At all, the studies have shown the existence of a weak form of market efficiency among the EMFs for respective periods of study and countries. Recently the studies done examine the cointegration between macroeconomic variables and stock prices in order to test for the informational efficient market hypothesis. All the studies are covering on the period before the financial crises in July 1997. However, there is no attempt to study the cointegration between the variables and the stock market after the financial crisis.
A number of macroeconomics factors of any country influence the performance of the stock market which is working within the country. Investors consider macroeconomics factors very important when they invest in stock market. Inflation rate, interest rate and exchange rate are the most important variables between these macroeconomic factors which affects the performance of the stock market.
Inflation and unemployment are two key elements when evaluating a whole economy and it is also easy to get those figures from National Bureau of Statistics when you want to evaluate it. However, the relationship between them is a controversial topic, which has been debated by economists for decades. From some famous economists such as Paul Samuelson, Milton Freidman etc to some infamous economists, this topic received a lot of attention. However, it is this debate that makes the thinking about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on that according to time sequencing. But before started, it is worthy getting a better understanding of the terms, inflation and unemployment.
Inflation is defined as an increase in the expected price level and has been the signal for an improving economy, but it has also weakened an economy due to the unemployment it usually produces which usually hurts the Middle class the most. A healthy rate of inflation means an expanding economy due to higher tax revenues for the government and higher wages for businesses that are booming due to the high demand of their products. But if inflation surpasses of what is expected than employer will have to reduce wages to meet these new prices. When the Federal Reserve creates inflation most argue that this is robbing people of the money that they have saved because they have to use it due to the rise in prices. Printing
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.
It is clearly shown that ‘Difference in Interest rates’ equals ‘Expected difference in Inflation rates’ and the ‘Expected change in spot rate’ equals ‘expected difference in inflation rates’ and ‘Difference in interest rates’. Therefore, it can be said for sure that both interest rates and inflation rates are theoretically associated with expected changes in spot rates.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.