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JNKPING UNIVERSITY
Tutors:
Jnkping
May 2013
Acknowledgments
I would like to thank my supervisors Professor Per-Olof Bjuggren and Louise Nordstrm for their
invaluable contributions.
Jnkping, May 2013
Author:
Tutors:
Date:
2013-05-17
Abstract
The key objective of the present study is to investigate the impact of changes in selected
macroeconomic variables on stock prices of the Stockholm Stock Exchange (OMXS30). To
estimate the relationship, unit root test, Multivariate Regression Model computed on Standard
Ordinary Linear Square (OLS) method and Granger causality test have been used. The time
period examined is 1993-2012 and all the tests are conducted based on monthly data. Based on
estimated regression coefficients and t-statistics, it is found that inflation and currency
depreciation have a significant negative influence on stock prices. In addition, interest rate is
negatively related to stock price change, but it is not significant in the model. On the other hand,
money supply is positively associated to stock prices although not significant. No unidirectional
Granger Causality is found between stock prices and all the predictor variables under study
except one unidirectional causal relation from stock prices to inflation.
Abbreviations
ADF Augmented Dickey-Fuller
APT Asset Pricing Theory
CAPM Capital Asset Pricing Model
OMXS30........ OMX Stockholm 30
OLS Ordinary Least Square
Table of Contents
1
Limitations .................................................................................................................................... 7
1.2
Outline ........................................................................................................................................... 8
2.2
4.1
4.2
Data ............................................................................................................................................. 19
4.3
Methodology ............................................................................................................................... 20
5.2
5.3
5.3.1
5.3.2
5.3.3
Heteroscedasticity Test........................................................................................................ 28
5.3.4
5.3.5
Further Research.......................................................................................................................... 31
References ......................................................................................................... 33
Appendix ........................................................................................................... 37
8.1
8.1.1
8.1.2
8.1.3
8.1.4
8.1.5
8.2
8.3
1 Introduction
A stock exchange market is the center of a network of transactions where buyers and sellers of
securities meet at a specified price. Stock market plays a key role in the mobilization of capital in
emerging and developed countries, leading to the growth of industry and commerce of the
country, as a consequence of liberalized and globalized policies adopted by most emerging and
developed government. Many factors can be a signal to stock market participants to expect a
higher or lower return when investing in stock and one of these factors are macroeconomic
variables. The change in macroeconomic variables can significantly impact stock price return.
The results of this empirical research help the reader to understand whether the movement of
stock prices of the Stockholm Stock Exchange (OMXS30) is subject to some macroeconomic
variables change. Investors will find this study as a helpful tool for them to identify some basic
economic variables that they should focus on while investing in stock market and will have an
advantage to make their own suitable investment decisions.
The present research considers four macroeconomic variables: Consumer Price Index (CPI) as
proxy for inflation rate, Exchange Rate (ER), Money Supply (MS), Interest Rate (IR) and on the
other hand Stockholm Stock Exchange indices in the form of OMXS30. In the study we use the
Ordinary Least Squared (OLS) to test the impact of macroeconomic variables on Stockholm
Stock Exchange Indices and vice versa (using the Granger causality test), based on monthly data
from January, 1993 to December, 2012. Besides, Augmented Dickey-Fuller (ADF) test to check
the stationarity of the data and diagnostic checking to check if residuals from the regression are
white noise.
The objective of this paper is to investigate the impact of macroeconomic variables on the stock
market prices of the Stockholm stock exchange during the period 1993-2012. This paper is a
complement to the existing literature. To our knowledge, the present research is the most recent
one that focuses on the Swedish stock market.
1.1
Limitations
Another three important macroeconomic variables that are commonly used in research to explain
changes in stock prices have been excluded from the present paper namely: Industrial Production,
7
Foreign Exchange Reserves and Oil Prices variables. The exclusion of the Industrial Production
and Oil Price variables was due to the lack of consistent data for the study period. However, the
Foreign Exchange Reserves variable was negative and insignificant when included in the
regression model and there was not previous research to attest to this finding of negative
relationship between foreign exchange reserves and stock prices. Besides, this result can be
explained by the fact that Sweden has a fluctuating exchange regime. Based on that, foreign
exchange reserves variable was excluded from the model and its exclusion did not affect the
regression and the residual diagnostic testing results.
1.2 Outline
The thesis is organized as follows. Section 2 reviews the theoretical framework with respect to
both efficient market hypothesis and arbitrage pricing theory. Section 3 provides a literature
review and gives support to the variables considered in this research. Section 4 describes the data
and methodology used in the research. Section 5 focuses on the empirical results and discussions
of ADF test, regression analysis, diagnostic checking and Granger causality test. Section 6
provides a discussion as well as suggestions for further research and concludes this research.
2 Theoretical Framework
Different theoretical frameworks have been employed by many researchers to link changes in
macroeconomic variables with stock market returns. These include the semi strong efficient
market hypothesis developed by Fama (1970) and the Arbitrage Pricing Theory (APT) developed
by Ross (1976). These theories are discussed in this section as they relate the macroeconomic
variables to stock market return.
2.1
Popularly known as random walk theory, the efficiency market hypothesis assumes that market
prices should incorporate all available information at any point in time. The term efficient
market was first used by Eugene Fama (1970) who said that: in an efficient market, on the
average, competition will cause the full effects of new information on intrinsic values to be
reflected instantaneously in actual prices. Fama defined an efficient market as a market where
prices always reflect all available information. Indeed, profiting from predicted price
movements is unlikely and very difficult as the efficient market hypothesis suggests that the main
factor behind price changes is the arrival of new information.
However, there are different kinds of information that affect security values. Consequently, the
efficient market hypothesis is stated in three variations namely: the weak form hypothesis, semi
strong form hypothesis and the strong form hypothesis depending on what the term available
information means.
This paper focuses on the semi strong hypothesis since it is the most convenient for our study. As
a matter of fact, the semi strong hypothesis states that all publicly available information is already
incorporated into current prices; that is the asset prices reflect all available public information.
Indeed, the semi strong hypothesis is used to investigate the positive or negative relationship
between stock return and macroeconomic variables since it postulates that economic factors are
fully reflected in the price of stocks. Public information can also include data reported in a
companys financial statement, the financial situation of companys competitors, for the analysis
of pharmaceutical companies. Hence, information is public and there is no way to make profit
using information that everybody else knows. So the existence of market analysts is required to
be able to understand the implication of vast financial information as well as to comprehend
processes in product and input market.
9
(1)
Where
= the expected level of return for stock i if all indices have a value of zero
= the value of the jth index that impacts the return on stock i
= the sensitivity of stock is return to the jth index
= a random error term with mean equals to zero and variance equal to
According to Chen and Ross (1986), individual stock depends on anticipated and unanticipated
factors. They believe that most of the return realized by investors is the result of unanticipated
events and these factors are related to the overall economic conditions. In fact, although asset
returns can also be affected by influences that are not systematic to the economy, returns on large
10
portfolios are mainly influenced by systematic risk because idiosyncratic returns on individual
assets are cancelled out through the process of diversification.
11
3 Literature Review
Founded in 1863, Stockholm Stock Exchange is the main securities market in Sweden. After
merging with OMX in 1998, Stockholm Stock Exchange is held today by the Nordic division of
the largest exchange holding company in the world, namely NASDAQ OMX. An overview of
Stockholm Stock Price Index is represented on figure 1 from 1993 to 2012 (monthly
representation). The measure of predictability and efficiency of stock returns has always been an
interesting topic for researchers, investors and government agencies.
Figure 1: Stockholm stock Price Index (1993-2012)
1992-01-31 2012-12-31 M OMX STOCKHOLM 30 (OMXS30) - PRICE INDEX
1,600
1,400
1,200
1,000
800
600
400
200
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Several researchers have centered their empirical studies on the relationship between stock
market movement and macroeconomic variables and this has been intensively examined in both
emerging and developed capital markets. Homa and Jaffe (1971), Hamburger and Kochin (1972)
find a positive relationship between money supply and stock prices. This result follows the ideas
of real activity economists who argue that if there is an increase in money supply; it means that
money demand is increasing which is a signal of an increase in economic activity. This increase
in economic activity implies higher cash flows, which causes stock prices to rise (Sellin, 2001).
Grossman and Shiller (1980) examine how historical movements can be justified by new
information. Using historical data from 1890-1979, they show evidence that stock price
movement can be attributed to real interest rate movement.
12
Another study is that of Chen, Roll and Ross (1986) who investigate the impact of
macroeconomic variables on stock prices. They employ seven macroeconomic variables to test
the multifactor model in the USA. They find that consumption market index and oil prices are not
related to financial market while industrial production, change in risk premium and twist in the
yield curve are significantly related to stock returns.
Gjerde and Saettem (1999) study the relation between stock returns and macroeconomic variables
in Norway. Their results show a positive relationship between oil price and stock returns as well
as real economic activity and stock returns. However, their study fails to show a significant
relation between stock returns and inflation.
Bhattacharya et. al. (2001) analyze the causal relationship between the stock Market and three
macroeconomic variables in India`s case using the Granger non-causality. These macroeconomic
variables are: exchange rate, foreign exchange reserves and trade balance. The results suggest
that there is no causal linkage between stock prices and the three variables under consideration.
In their study based on six Asian countries, Doong et al (2005) investigate the relationship
between stocks and exchange rates using the Granger causality test. According to their results,
there is a significantly negative relation between the stock returns and change in the exchange
rates for all the included countries except one.
Uddin and Alam (2007) examine the linear relationship between share price and interest rate as
well as share price and changes of interest rate. In addition, the also explore the association
between changes of share price and interest rate and lastly changes of share price and changes of
interest rate in Bangladesh. They find for all of the cases that Interest Rate has significant
negative relationship with Share Price and Changes of Interest Rate has significant negative
relationship with Changes of Share Price.
Geetha, Mohidin, Chandran and Chong (2011) investigate the relationship between stock market,
expected inflation rate, unexpected inflation rate, exchange rate, interest rate and GDP in the case
of Malaysia, US and China. They use cointegration test to determine the number of cointegrating
vectors, which shows the long-run relationship between the variables while the short-run
relationship was determined using the Vector Error Correction model. Their results indicate that
there is a long run cointegration relationship between stock markets and those variables in
13
Malaysia, US and China. On the other hand, there is no short run relationship between the stock
market, unexpected inflation, expected inflation, interest rate, exchange rate and GDP for
Malaysia and US using VEC. However, Chinas VEC result shows that there is a short-run
relationship between expected inflation rates and Chinas stock market.
Gay (2008) investigates the relationship between stock market index price and and the
macroeconomic variables of exchange rate and oil price for emerging countries (Brazil, Russia,
India, and China) using the Box-Jenkins ARIMA model. He finds no significant relationship
between respective exchange rate and oil price on the stock market index prices in any of the
emerging countries. He concludes that this result suggests that the markets of Brazil, Russia,
India, and China exhibit the weak-form of market efficiency.
Mohammad (2011) uses Multivariate Regression Model computed on Standard OLS formula and
Granger causality test to model the impact of changes in selected microeconomic and
macroeconomic variables on stock returns in Bangladesh. He examines monthly data for all the
variables under study covering the period from July 2002 to December 2009. The study finds a
negative relationship between stock returns and inflation as well as foreign remittance while
market Price/Earnings and growth in market capitalization have a positive influence on stock
returns. However, no unidirectional Granger Causality is found between stock returns and any of
the independent variables and the lack of Granger Causality reveals the evidence of an informally
inefficient market.
Mahedi (2012) examines the long-run relationship and the short-run dynamics among
macroeconomic variables and the stock returns of Germany and the United Kingdom. He uses the
Johansen Co-integration test to indicate the co-integrating relationship between the stock prices
and macroeconomic determinants. And then, he uses error-correction models to investigate both
the short-and long-term casual relationships and each case is examined individually. For
Germany case, the results show that the short-run causality runs from stock returns to inflation,
from money supply to stock returns and from industrial production to stock returns. The long-run
causality runs from inflation to stock returns and from exchange rate to stock returns. There is
only one short-and long-run relationship, that is from the stock returns to industrial production.
For the United Kingdom case, he finds that the short run causality run from stock returns to Tbill, from stock returns to money supply, from stock returns to exchange rate, exchange rate to
14
stock returns and stock returns to industrial production. The long run causality runs from inflation
to stock returns. The short and long-run causal relationship runs from stock returns to inflation,
from money supply to stock returns and from industrial production to stock returns. These results
indicate the existence of short-run interactions and long term causal relationship between both
Germany and the UK stock markets and the macroeconomic fundamentals.
Ray Sarbapriya (2012) uses a simple linear regression model and Granger causality test to
measure the relationship between foreign exchange reserves and stock market capitalization in
India. The results show that causality is unidirectional and it runs from foreign exchange reserve
to stock market capitalization and that foreign exchange reserves have a positive impact on stock
market capitalization in India.
Many other early studies of Lintner (1973), Jaffe and Mandelker (1977) and Fama and Schwert
(1977) examine the relationship between inflation and stock prices. Most of these studies test the
Fisher hypothesis which predicts a positive relationship between expected nominal returns and
expected inflation and their findings are inconsistent with the Fisher hypothesis. They all report a
negative linkage between stock returns and inflation. However, Firth (1979) observes a positive
relationship between nominal stock returns and inflation when studying the relationship between
stock market returns and rates of inflation in the United Kingdom.
Table 1: Impact of macroeconomic variables on stock market
Macroeconomic
variables
Inflation
Interest rate
Exchange rate
Positive
Negative
Insignificant
Firth (1979)
Lintner (1973)
Fama and Schwert
(1977)
Mandelker (1977)
Geetha, Mohidin,
Chandran and
Chong (2011)
Uddin and Alam
(2007)
Geetha, Mohidin,
Chandran and
Chong (2011)
Geetha, Mohidin,
Chandran and
Chong (2011)
Doong et al (2005)
Gjerde and
Saettem (1999)
15
Bhattacharya et.
al.(2001)
Robert D. Gay
(2008)
Money Supply
Oil price
Mahedi (2012)
(1999)
Foreign exchange
reserves
Ray Sarbapriya
(2012)
Industrial production
Mahedi (2012)
Chen, Roll and Ross
(1986)
Bhattacharya et.
al.(2001)
16
lending in the short term, from several days to just under a year. An increase in the interest rate
will result in falling stock prices due to the fact that high interest rate will increase the
opportunity cost of holding money, causing substitution of stocks for interest bearing securities.
Interest rate is one of the important macroeconomic variables and is directly related to economic
growth. From the point of view of a borrower, interest rate is the cost of borrowing money while
from a lenders point of view, interest rate is the gain from lending money. The interest rate is
expected to be negatively associated to stock returns.
Exchange Rate (ER)
The next macroeconomic variable used in this study is the exchange rate which in this case is the
bilateral nominal rate of exchange of the Swedish krona (SEK) against one unit of a foreign
currency, Euro (). The reason is that Eurozone countries are the main market for Swedish
foreign trade. An increase in exchange rate (depreciation) will cause a decline in stock prices
because of expectations of inflation. Moreover, heavy importer companies will suffer from higher
costs due to a weaker domestic currency and will have lower earnings, and lower share prices. As
a result, the stock market, which is a collection of a variety of companies, trends to react
negatively to currency depreciation.
inflation, since the expansion of the money supply is positively related to inflation in the
economy which would increase the nominal risk free rate (Fama, 1981). This increase in the
nominal risk free rate will lead to a rise in the discount rate which leads to a fall in return. A
positive relationship between money supply and stock price is expected in this study.
Table 2: Regression Variables
Explanations
Variables
Expected sign of
coefficient
OMXS30
The OMX
Nasdaq OMX, Jan
Stockholm 30 is a
1993 - Dec 2012,
stock market index
monthly.
for the Stockholm
Stock Exchange, in
Swedish Krona.
Independent variables
CPI
Statistics Sweden
(SCB), Jan 1993 Dec 2012, monthly.
International
Financial Statistics
(IMF), Jan 1993 Dec 2012, monthly.
WM/Reuters, Jan
1993 - Dec 2012,
monthly.
Sveriges Riksbank,
Jan 1993 - Dec 2012,
monthly.
IR
ER
MS
Na
4.2 Data
The objective of this paper is to empirically examine the impacts of some macroeconomic factors
on the stock market returns of the Stockholm stock exchange (OMXS30). In this study, stock
price index (OMXS30) is considered as the dependent variable. On the other hand, based on
19
previous studies, four macro-economic variables namely Consumer Price Index (CPI), Call
Money Rate (IR), Exchange Rate (ER) and Money Supply (MS) are used as predictor variables.
The study examines monthly data for all the variables under study covering the period from
January 1993 to December 2012 (240 monthly observations) which are collected from the
Thomson Reuters Financial Datastream.
Table 3 presents the summary of descriptive statistics for the selected dependent and independent
variables under study. 240 monthly observations of all the variables have been examined to
estimate the following statistics. The mean describes the average value in the series and Std.
Deviation measures the dispersion or spread of the series. The maximum and minimum statistics
measures upper and lower bounds of the variables under study during our chosen time span.
Table 3: Descriptive statistics for 1993-2012
Mean
Minimum
Maximum
LOMXS30
762,1750
174,1300
1433,080
Std.
Deviation
308,3970
LCPI
275,8629
241,0000
315,4900
21,32207
LIR
3,895542
0,350000
10,90000
2,353708
LER
9,137867
8,139000
11,46000
0,519209
LMS
83 727,82
58 646,00
100 883,0
13 218,25
240
4.3 Methodology
Two main econometric models are conducted in this study: the Ordinary Least Squared (OLS) to
test the relationship between the macroeconomic variables and the stock price index (OMXS30),
and Granger Causality test to examine the relation between individual explanatory variables and
OMXS30 (either unidirectional, bidirectional or no relation).
However, it is important to keep in mind that time series data analysis is subject to the problem of
spurious regression if the data is non-stationary, resulting in unreliable results of the models
constructed. So to avoid spurious regression, the unit root test (Augmented Dickey Fuller test)
will be conducted first to check if the time series data is stationary. If the test shows that the data
is non-stationary, the first difference of the variables will be employed before conducting the
20
OLS method and the Granger Causality Test. The multivariate regression is developed in the
following equation:
(2)
Firstly, all the variables under study are transformed into the logarithmic form. Then, because of
the existence of a unit root in all the variables data series (Tables 4 and 5), the first difference of
logarithm of all the variables and the second difference of the logarithm of money supply are
used.
21
5 Empirical Results
5.1 Unit Root Test
When dealing with time series data, it is important to examine the existence of unit root in the
data series. If the variable is not stationary, we can obtain a high
although there is no
No unit root
[Variable is stationary]
If the coefficient is significantly different from one (less than one) then the hypothesis that y
contains a unit root is rejected. Rejection of the null hypothesis denotes stationarity in the series.
If we dont reject the null hypothesis, we conclude we have a unit root. Before running ADF test,
we plot the variable to check if there is a trend and use the Elder and Kennedy unit root model
selection approach. OMXS30, CPI MS and IR are growing as we can see respectively from
figures 4a, 5a, 6a and 7a (Appendix 1). So the ADF test is run at level with trend and intercept as
summarized in table 4.
By looking at the results, it appears that the p-values for all the included variables in our research
are greater than the critical value (5%). So we cannot reject the null hypothesis and we must
therefore conclude that four variables out of five which are growing are non-stationary, meaning
that those variables follow a random walk with drift and no time trend. This implies that we need
to take the first difference of those variables before they can be run in the regression model
22
P value
LOMXS30 is nonstationary
LCPI is non-
0,4113
Null
hypothesis
Do not reject
0,0567
Do not reject
Results
LOMXS30 is nonstationary
LCPI is nonstationary
stationary
LMS is non-
0,9999
Do not reject
LMS is non-stationary
0,0989
Do not reject
LIR is non-stationary
stationary
LIR is nonstationary
The only variable left is the ER variable which is not growing (Figure 8a, Appendix 1). So we
run the ADF test only at level, with intercept and no trend as we can see the result from table 5.
Table 5: ADF Test at level, intercept
LER
0,1356
Do not reject
LER is
nonstationary
Since the p-value (0.1356) is greater than the critical value (5%), we cannot reject the null
hypothesis and we can conclude that ER variable is following a pure random walk.
Following the results from table 4 and 5, the remedy is to take the first difference of all the
variables before using them in the regression model. Table 6 is the summary of such test. The pvalues of four out of five variables included in our regression are less than the critical value (5%).
In other words, the p-values of OMXS30, CPI, IR and EP are less than 5%, meaning that we
reject the null hypothesis. We can conclude that those variables are stationary at first difference.
It is easy to see that the trend on OMXS30, CPI and IR variables is removed when taking their
first difference as we see in their respective figures 4b, 5b, 7b (Appendix 1).
However, the p-value for MS is greater than critical level, 25, 39%
null hypothesis and we conclude that MS is non-stationary at first difference and it follows a pure
random walk at first difference since it is not growing (Figure 6b, Appendix 1).
23
difference
Null hypothesis
P-value
Results
0,0000*
Null
hypothesis
Reject
LOMXS30 is not
stationary
LCPI is not
0,0135*
Reject
LCPI is stationary
0,2539
Do not reject
LMS is non-stationary
0,0000*
Reject
LER is stationary
0,0002*
Reject
LIR is stationary
LOMXS30 is stationary
stationary
The results of ADF test at first difference conclude that all variables are stationary, except MS.
So we need to run ADF test at second difference at level for MS variables since it follows a pure
random walk at first difference. From table 7, we can see that the p-value (0%) is less than
critical level (5%). We reject the null hypothesis and conclude that MS variable is stationary at
second difference.
Table 7: ADF test at
difference
Null hypothesis
P value
Null hypothesis
Results
0,0000*
Reject
LMS is
stationary
Where D is the first difference and DD is the second difference. The model output is summarized
in table 8.
Coefficient
t-Statistic
Probability
0,008853
2,233070
0,0265
24
DLCPI
2,066528
2,069061*
0,0396
DDLMS
0,119401
1,215672
0,2253
DLIR
0,048940
1,043833
0,2976
DLER
1,190890
5,493487*
0,0000
R-squared
0,128075
Adjusted R-
0,113106
squared
F-statistic
8,556205
238
Note: DLOMXS30, DLCPI, DLIR and DLER denote the first difference of the log values of
stock price index (OMXS30), consumer price index, interest rate, exchange while DDLMS
denotes the second difference of the log value of money supply. (*) sign means significant at
5% critical level.
Table 8 presents the output of the Ordinary Least Square (OLS) method to show the impact of the
macroeconomics variables on stock market prices. I can be noticed that both the predicted and all
the predictor variables are log-transformed. This is associated with the price elasticity meaning
that the percentage change in Y is caused by one percentage change in X. For example in the case
of this study, 1% change in inflation will cause stock prices to decrease by 206%. The output
from table 8 shows a significant relationship between inflation (DLCPI) and stock price index
(since its p-value 0.0396 is less than 5%). The negative sign of the coefficients means that
increase in inflation will cause stock price to fall. This is consistent with the previous evidence of
a negative and significant linkage between inflation and stock returns (Lintner, 1973; Fama and
Schwert, 1977). Another negative significant linkage is found between exchange rate and stock
prices as it can be seen on its negative coefficient sign and its p-value (0.0000<0.05). This means
that depreciation of currency will cause the stock price to fall and this result confirms early
evidence (Doong et al, 2005). Although the other macroeconomic variables are not significant,
their coefficient signs confirm our expectations. Indeed, the money supply coefficient is positive,
meaning that an increase in money supply will cause the price to increase as well. The negative
coefficient sign of the interest rate means that an increase in the interest rate will cause the stock
price to decrease.
25
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Partial Correlation
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1
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5
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7
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9
10
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15
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18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
AC
PAC
0.038
-0.007
0.137
0.035
0.028
0.092
-0.047
0.045
0.022
-0.073
0.062
0.067
-0.107
-0.006
-0.040
0.019
-0.029
-0.006
0.074
-0.028
-0.011
0.023
0.044
0.034
0.005
0.000
-0.009
-0.140
-0.043
-0.019
-0.078
0.003
-0.067
-0.007
0.042
-0.030
0.038
-0.009
0.138
0.024
0.029
0.074
-0.062
0.045
-0.007
-0.066
0.058
0.052
-0.089
-0.017
-0.056
0.053
-0.046
0.018
0.091
-0.049
0.017
0.000
0.041
0.033
-0.004
0.008
-0.038
-0.166
-0.016
-0.047
-0.046
0.049
-0.060
0.054
0.015
0.008
26
Q-Stat
0.3533
0.3660
4.9348
5.2256
5.4179
7.5181
8.0672
8.5731
8.6972
10.049
11.004
12.134
15.033
15.042
15.443
15.540
15.763
15.772
17.194
17.394
17.426
17.570
18.092
18.404
18.412
18.413
18.433
23.757
24.271
24.368
26.054
26.056
27.295
27.308
27.794
28.056
Prob
0.552
0.833
0.177
0.265
0.367
0.276
0.327
0.380
0.466
0.436
0.443
0.435
0.305
0.375
0.420
0.486
0.541
0.608
0.577
0.627
0.685
0.731
0.752
0.783
0.824
0.860
0.890
0.694
0.715
0.755
0.719
0.761
0.747
0.785
0.802
0.825
Figure 2 is the Eviews output of correlogram for the residuals. We cannot see any pattern in the
SAC or SPAC which ensures the robustness of the results.
5.3.2
autcorrelation
Autocorrelation
Table 9: Breusch-Godfrey Serial Correlation LM Test
F-statistic
Obs*R-squared
0.180342
0.371034
Prob. F(2,231)
Prob. Chi-Square(2)
0.8351
0.8307
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 05/15/13 Time: 17:07
Sample: 1993M03 2012M12
Included observations: 238
Presample missing value lagged residuals set to zero.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
DLER
DLIR
DDLMS
DLCPI
RESID(-1)
RESID(-2)
-2.51E-05
0.006635
0.001296
-0.003736
0.034184
0.039047
-0.008835
0.003979
0.218884
0.047124
0.098794
1.003992
0.066153
0.066265
-0.006303
0.030314
0.027493
-0.037821
0.034048
0.590251
-0.133322
0.9950
0.9758
0.9781
0.9699
0.9729
0.5556
0.8941
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.001559
-0.024375
0.058130
0.780575
342.9720
0.060114
0.999126
-3.13E-18
0.057434
-2.823294
-2.721169
-2.782136
1.997244
Table 9 is the summary of the serial correlation LM test from Eviews. The p-value is 83.51%
which is greater than critical value, 5%. We cannot reject the null hypothesis and we can
conclude for the absence of autocorrelation.
27
5.3.3
Heteroscedasticity Test
This test is important to confirm the robustness of the OLS output since we cannot rely on them
in the presence of heteroscedasticity. The hypotheses are:
No heteroscedasticity
Heteroscedasticity
Table 10 summarizes the Eviews output from the Heteroscedasticity test. The p-value is 0, 7134
which is greater than critical value, 5%. So we cannot reject the null hypothesis and we can
conclude that homoscedasticity is present, and thus OLS t-test results can be trusted.
Table 10: Heteroscedasticity Test: Breusch-Pagan-Godfrey
F-statistic
Obs*R-squared
Scaled explained SS
0.530595
2.148355
2.649181
Prob. F(4,233)
Prob. Chi-Square(4)
Prob. Chi-Square(4)
0.7134
0.7085
0.6181
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 05/15/13 Time: 17:10
Sample: 1993M03 2012M12
Included observations: 238
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
DLER
DLIR
DDLMS
DLCPI
0.003168
0.020543
-0.001944
-0.004601
0.095540
0.000363
0.019840
0.004291
0.008989
0.091410
8.730136
1.035418
-0.453121
-0.511804
1.045175
0.0000
0.3015
0.6509
0.6093
0.2970
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
5.3.4
0.009027
-0.007986
0.005301
0.006549
911.8852
0.530595
0.713366
0.003285
0.005280
-7.620884
-7.547937
-7.591485
1.755580
Normality Test
This test is important to find out whether the error term follows normal distribution and the
hypotheses are stated as follows:
28
Series: Residuals
Sample 1993M03 2012M12
Observations 238
20
16
12
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
-3.13e-18
0.001095
0.139142
-0.180475
0.057434
-0.427880
3.573224
Jarque-Bera
Probability
10.52070
0.005193
0
-0.15
-0.10
-0.05
0.00
0.05
0.10
From our diagnostic checking results, we can assume that residuals from our linear regression are
white noise, meaning that they do not contain any systematic information. However, in reality it
is hard to find a model with completely white noise residuals; this is confirmed by the normality
test where we found that residuals are not normally distributed.
5.3.5 Granger Causality Test
The Granger Causality test is a statistical hypothesis test to determine whether one time series is
significant in forecasting another. This test aims at determining whether past values of a variable
help to predict changes in another variable (Granger, 1988). In addition, it also says that variable
29
The overall Granger Causality test reveals that only inflation granger causes the stock prices
while the stock prices do not affect any of the four macroeconomic variables included in the
research.
Table 11: Test for Granger Causality between Stock Index and the Macroeconomic
Variables
Null Hypothesis
P-Value Result
Relationship
DLCPI does not Granger Cause DLOMXS30
0,0175*
Reject
0,5930
Do not reject
0,7617
0,3645
Do not reject
0,6741
0,1719
Do not reject
0,2604
0,1403
Do not reject
30
Unidirectional
relation
The negative relationship between inflation and stock price can be explained by the fact that
additional funds flow due to inflation increase the supply in the stock market while the demand
side remains unaffected. This static condition on the demand side of the security market puts
downward pressure on the stock price. It is important for investors to follow the CPI because
periods of high inflation make difficult the market conditions. Besides, deprecation of Swedish
krona (exchange rate) and high interest rate decrease the flow of capital and this will also
decrease the additional funds flowing in the stock market. On the other hand, a positive
relationship is found between stock price and money supply although it is insignificant.
Furthermore, the Granger causality test shows that inflation is the only macroeconomic variable
that causes stock price while stock price has no effect on any of the macroeconomic variables.
On the basis of the above overall analysis, it can be concluded that two out of the four selected
macroeconomic variables are relatively significant and likely to influence the stock prices of the
Stockholm Stock Exchange. These macroeconomic variables are inflation and exchange rate. The
evidence of this study is consistent with other similar studies. However, the results from this
empirical research should not be a conclusive indicator for investment.
that the performance of particular companies and their results matter in determining the price of a
stock. Indeed, high corporate profits lead to higher stock prices due to high demand. Moreover
rumors of positive news for firms and the re-purchase of shares listed give a positive impact and
lead to higher stock prices. Thus for further study, we could discuss the role of micro economic
factors on stock price and how an investor can reduce microeconomic risk by undertaking a
strong portfolio diversification strategy
32
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36
Appendix
LOMXS30
DLOMXS30
7.6
.20
7.2
.15
.10
6.8
.05
6.4
.00
6.0
-.05
5.6
-.10
5.2
-.15
4.8
-.20
1994
1996
1998
2000
2002
2004
2006
2008
2010
1994
2012
1996
1998
2000
t-Statistic
Prob.*
-2.338122
-3.996918
-3.428739
-3.137804
0.4113
Coefficient
Std. Error
t-Statistic
Prob.
LOMXS30(-1)
C
@TREND(1993M01)
-0.028889
0.188962
6.18E-05
0.012356
0.073084
8.80E-05
-2.338122
2.585527
0.702575
0.0202
0.0103
0.4830
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
0.033618
0.025429
0.060934
0.876254
331.0969
37
0.007730
0.061724
-2.745581
-2.701943
-2.727996
2002
2004
2006
2008
2010
2012
F-statistic
Prob(F-statistic)
4.104967
0.017683
Durbin-Watson stat
1.828865
t-Statistic
Prob.*
-14.19131
-3.457747
-2.873492
-2.573215
0.0000
Coefficient
Std. Error
t-Statistic
Prob.
DLOMXS30(-1)
C
-0.915322
0.006658
0.064499
0.004012
-14.19131
1.659553
0.0000
0.0983
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.460440
0.458154
0.061414
0.890129
327.3431
201.3934
0.000000
38
-0.000382
0.083432
-2.733976
-2.704797
-2.722216
1.992694
LCPI
.015
5.76
5.72
.010
5.68
.005
5.64
.000
5.60
-.005
5.56
-.010
5.52
-.015
5.48
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
1994
1996
1998
t-Statistic
Prob.*
-3.379350
-3.998997
-3.429745
-3.138397
0.0567
Coefficient
Std. Error
t-Statistic
Prob.
LCPI(-1)
D(LCPI(-1))
D(LCPI(-2))
D(LCPI(-3))
D(LCPI(-4))
D(LCPI(-5))
D(LCPI(-6))
D(LCPI(-7))
D(LCPI(-8))
D(LCPI(-9))
D(LCPI(-10))
D(LCPI(-11))
D(LCPI(-12))
-0.062361
0.076480
-0.003993
0.060000
-0.041234
0.098577
0.174093
0.097530
-0.100681
0.008292
-0.065693
0.021451
0.453105
0.018453
0.061712
0.062184
0.061247
0.061320
0.059815
0.060284
0.061132
0.061567
0.061434
0.061549
0.061714
0.062955
-3.379350
1.239306
-0.064218
0.979641
-0.672441
1.648046
2.887886
1.595390
-1.635314
0.134974
-1.067324
0.347587
7.197310
0.0009
0.2166
0.9489
0.3284
0.5020
0.1008
0.0043
0.1121
0.1035
0.8928
0.2870
0.7285
0.0000
39
2000
2002
2004
2006
2008
2010
2012
C
@TREND(1993M01)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.342300
6.78E-05
0.455612
0.419662
0.003056
0.001979
1000.164
12.67346
0.000000
0.101116
2.02E-05
3.385223
3.357009
0.0008
0.0009
0.001100
0.004011
-8.679856
-8.453538
-8.588534
1.891394
t-Statistic
Prob.*
-3.358253
-3.459231
-2.874143
-2.573563
0.0135
Coefficient
Std. Error
t-Statistic
Prob.
DLCPI(-1)
D(DLCPI(-1))
D(DLCPI(-2))
D(DLCPI(-3))
D(DLCPI(-4))
D(DLCPI(-5))
D(DLCPI(-6))
D(DLCPI(-7))
D(DLCPI(-8))
D(DLCPI(-9))
D(DLCPI(-10))
D(DLCPI(-11))
D(DLCPI(-12))
C
-0.723163
-0.165876
-0.202589
-0.192171
-0.266742
-0.212837
-0.053967
0.025794
-0.108493
-0.149503
-0.248080
-0.263714
0.168842
0.000767
0.215339
0.213223
0.202566
0.191045
0.181621
0.173083
0.166606
0.157323
0.143267
0.125576
0.108681
0.089662
0.069071
0.000319
-3.358253
-0.777947
-1.000116
-1.005894
-1.468670
-1.229685
-0.323918
0.163957
-0.757281
-1.190544
-2.282651
-2.941199
2.444470
2.406206
0.0009
0.4375
0.3184
0.3156
0.1434
0.2202
0.7463
0.8699
0.4497
0.2352
0.0234
0.0036
0.0153
0.0170
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
0.675635
0.655744
0.003094
0.002029
992.4756
40
-3.29E-06
0.005272
-8.659076
-8.447184
-8.573565
F-statistic
Prob(F-statistic)
33.96799
0.000000
Durbin-Watson stat
2.025150
LMS
11.6
.12
11.5
.08
11.4
.04
11.3
11.2
.00
11.1
-.04
11.0
10.9
-.08
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
1994
1996
1998
2000
.05
.00
-.05
-.10
-.15
-.20
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
t-Statistic
Prob.*
1.153678
-3.998997
-3.429745
-3.138397
0.9999
Coefficient
Std. Error
t-Statistic
41
Prob.
2002
2004
2006
2008
2010
2012
LMS(-1)
D(LMS(-1))
D(LMS(-2))
D(LMS(-3))
D(LMS(-4))
D(LMS(-5))
D(LMS(-6))
D(LMS(-7))
D(LMS(-8))
D(LMS(-9))
D(LMS(-10))
D(LMS(-11))
D(LMS(-12))
C
@TREND(1993M01)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.012705
-0.194199
-0.153366
-0.104475
-0.102580
-0.116333
-0.061414
-0.083419
-0.043951
-0.063902
-0.111102
-0.090414
0.736823
-0.133221
-7.16E-05
0.819492
0.807572
0.010403
0.022942
722.0731
68.74731
0.000000
0.011013
0.049617
0.049583
0.049550
0.048886
0.048791
0.048984
0.048580
0.048045
0.046897
0.045831
0.045049
0.043197
0.120549
3.44E-05
1.153678
-3.913928
-3.093099
-2.108451
-2.098362
-2.384333
-1.253751
-1.717142
-0.914790
-1.362618
-2.424152
-2.007003
17.05740
-1.105118
-2.078582
0.2499
0.0001
0.0022
0.0362
0.0371
0.0180
0.2113
0.0874
0.3613
0.1744
0.0162
0.0460
0.0000
0.2704
0.0389
0.001440
0.023714
-6.229719
-6.003401
-6.138396
2.197766
t-Statistic
Prob.*
-2.077954
-3.459101
-2.874086
-2.573533
0.2539
Coefficient
Std. Error
t-Statistic
Prob.
DLMS(-1)
D(DLMS(-1))
D(DLMS(-2))
D(DLMS(-3))
D(DLMS(-4))
D(DLMS(-5))
D(DLMS(-6))
-0.496402
-0.623308
-0.698767
-0.724025
-0.747705
-0.785072
-0.766876
0.238890
0.221541
0.205643
0.190926
0.176362
0.160822
0.144662
-2.077954
-2.813504
-3.397968
-3.792173
-4.239596
-4.881614
-5.301171
0.0389
0.0054
0.0008
0.0002
0.0000
0.0000
0.0000
42
D(DLMS(-7))
D(DLMS(-8))
D(DLMS(-9))
D(DLMS(-10))
D(DLMS(-11))
C
-0.772039
-0.739469
-0.730786
-0.772972
-0.797253
0.000362
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.930032
0.926108
0.010522
0.023693
718.4132
237.0439
0.000000
0.126651
0.107656
0.086601
0.062900
0.036328
0.000800
-6.095783
-6.868812
-8.438530
-12.28884
-21.94611
0.452186
0.0000
0.0000
0.0000
0.0000
0.0000
0.6516
0.000367
0.038709
-6.215095
-6.018952
-6.135948
2.267276
t-Statistic
Prob.*
-14.47642
-3.459231
-2.874143
-2.573563
0.0000
Coefficient
Std. Error
t-Statistic
Prob.
DDLMS(-1)
D(DDLMS(-1))
D(DDLMS(-2))
D(DDLMS(-3))
D(DDLMS(-4))
D(DDLMS(-5))
D(DDLMS(-6))
D(DDLMS(-7))
D(DDLMS(-8))
D(DDLMS(-9))
D(DDLMS(-10))
D(DDLMS(-11))
C
-14.00613
11.76581
10.49057
9.230660
7.986648
6.739393
5.544024
4.379441
3.285571
2.242790
1.199476
0.174398
-0.000515
0.967513
0.912289
0.846878
0.771368
0.687349
0.596365
0.500154
0.402986
0.307751
0.218507
0.137373
0.064287
0.000698
-14.47642
12.89702
12.38734
11.96661
11.61949
11.30079
11.08463
10.86748
10.67606
10.26418
8.731499
2.712804
-0.737762
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0072
0.4615
R-squared
Adjusted R-squared
0.977896
0.976650
43
-3.29E-05
0.068529
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.010472
0.023357
716.3657
785.2555
0.000000
-6.224475
-6.027719
-6.145072
2.035609
LIR
.6
2.5
2.0
.4
1.5
.2
1.0
0.5
.0
0.0
-.2
-0.5
-.4
-1.0
-1.5
-.6
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
1994
1996
1998
2000
t-Statistic
Prob.*
-2.578167
-3.457865
-2.873543
-2.573242
0.0989
Coefficient
Std. Error
t-Statistic
Prob.
LIR(-1)
D(LIR(-1))
D(LIR(-2))
C
-0.014248
0.296381
0.454985
0.013960
0.005526
0.057978
0.058129
0.007511
-2.578167
5.111939
7.827099
1.858625
0.0105
0.0000
0.0000
0.0643
R-squared
Adjusted R-squared
0.443244
0.436075
44
-0.008658
0.083713
2002
2004
2006
2008
2010
2012
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.062865
0.920805
321.4538
61.83178
0.000000
-2.678935
-2.620402
-2.655343
2.101240
t-Statistic
Prob.*
-4.577098
-3.457865
-2.873543
-2.573242
0.0002
Coefficient
Std. Error
t-Statistic
Prob.
DLIR(-1)
D(DLIR(-1))
C
-0.258343
-0.442473
-0.002245
0.056443
0.058621
0.004161
-4.577098
-7.547983
-0.539488
0.0000
0.0000
0.5901
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.381814
0.376531
0.063619
0.947073
318.1206
72.26353
0.000000
45
-0.000119
0.080571
-2.659245
-2.615346
-2.641551
2.074114
8.1.5
Exchange Rate
LER
DLER
2.45
.08
2.40
.06
2.35
.04
2.30
.02
2.25
.00
2.20
-.02
2.15
-.04
2.10
-.06
2.05
-.08
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
1994
1996
1998
2000
2002
t-Statistic
Prob.*
-2.426166
-3.457630
-2.873440
-2.573187
0.1356
Coefficient
Std. Error
t-Statistic
Prob.
LER(-1)
C
-0.050037
0.110527
0.020624
0.045616
-2.426166
2.422967
0.0160
0.0161
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.024235
0.020118
0.017562
0.073094
627.9237
5.886284
0.016007
46
-0.000112
0.017741
-5.237855
-5.208763
-5.226132
1.939537
2004
2006
2008
2010
2012
t-Statistic
Prob.*
-15.52755
-3.457747
-2.873492
-2.573215
0.0000
Coefficient
Std. Error
t-Statistic
Prob.
DLER(-1)
C
-1.003017
-0.000255
0.064596
0.001146
-15.52755
-0.222318
0.0000
0.8243
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.505350
0.503254
0.017677
0.073749
623.7370
241.1049
0.000000
-0.000161
0.025082
-5.224681
-5.195502
-5.212921
2.008000
Coefficient
Std. Error
t-Statistic
Prob.
C
DLER
DLIR
DDLMS
DLCPI
0.008853
-1.190890
-0.048940
0.119401
-2.066528
0.003965
0.216782
0.046885
0.098218
0.998776
2.233070
-5.493487
-1.043833
1.215672
-2.069061
0.0265
0.0000
0.2976
0.2253
0.0396
47
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.128075
0.113106
0.057925
0.781794
342.7864
8.556205
0.000002
0.007309
0.061508
-2.838541
-2.765594
-2.809142
1.923415
Obs
F-Statistic
Prob.
235
3.06201
0.69950
0.0175
0.5930
235
0.58462
1.61287
0.6741
0.1719
235
1.32775
1.74816
0.2604
0.1403
234
0.46457
1.08535
0.7617
0.3645
235
0.41512
0.26841
0.7977
0.8981
235
4.47235
0.30250
0.0017
0.8761
234
7.43796
29.6546
1.E-05
8.E-20
235
1.28290
2.89778
0.2775
0.0229
234
0.73560
0.65910
0.5685
0.6210
234
0.59499
0.34375
0.6666
0.8482
48