Stock Exchange In Macroeconomics

Stock exchange is a place where shares (securities) of various listed companies from different sectors of an economy are traded. Investment takes place in the stock exchange in the form of foreign or domestic investment and primary role of investors is to earn profit on their investment. This profit might be due to rise in stocks price or the dividend earned. Therefore, due to its functionality a stock exchange plays a vital role in a country’s economy and the aim is to have an efficient stock market which yields appropriate stock returns to investors.

Some factors both directly and indirectly influence the performance of a stock exchange and need to be understood by the investors for making a better decision regarding their investments. This study covers the macroeconomic factors and volatility (uncertainty) influencing the stock market returns. Macroeconomics deals with the broader picture of the economy and examines the recurring activities and developments in economy-wide occurrences, such as unemployment, inflation, economic growth, money supply and exchange rates etc.

Various empirical studies have tested the macroeconomic variables with the stock returns. For example Inflation has an effect on stock returns (Attari and Safdar 2013), Inflation

The present value model concentrates on the long-run relationship whereas the arbitrage pricing theory focuses on short-run relationship between the stock market movement and the macroeconomic fundamentals. According to these models, any new information about the fundamental macroeconomic factors such as, real output, inflation, money supply, interest rate and so on, may influence the stock price/return through the influence of expected dividends, the discount rate or both (Chen et al., 1986; Rahman et al.,