THE DYNAMIC CAUSALITY BETWEEN STOCK PRICES AND MACROECONOMIC VARIABLES: EVIDENCE FROM NEPAL

Mitra Lal Devkota
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Mitra Lal Devkota: UNIVERSITY OF NORTH GEORGIA, DAHLONEGA, GA 30597, USA

Annals - Economy Series, 2018, vol. 6, 5-14

Abstract: This paper investigates the dynamic causality between the Nepalese Stock Exchange (NEPSE) index and selected macroeconomic variables in Nepal. The findings suggest that, in the long-run, consumer price index, exchange rate, Treasury bill rate, and money supply are positively related to the NEPSE Index, while the gross domestic product is negatively related to the NEPSE Index. The vector error correction model(VECM) results indicate that there are unidirectional long-run Granger causalities running from both the consumer price index and the money supply to the NEPSE Index. In addition, there is a unidirectional short-run Granger causality running from the exchange rate to the NEPSE Index. Finally, there are feedback relationships between the gross domestic product and the NEPSE Index, and between the Treasury bill rate and the NEPSE Index. The Variance Decomposition (VDC) analysis shows that most of the variation in the NEPSE Index is captured by its own innovation, although all the macroeconomic variables in the study seem to have some effect on the NEPSE Index in the short-run. These findings have important implications fordecision making by investors, stock market regulators, and national policymakers.

Keywords: Cointegration; Granger Causality; Gross Domestic Product; Money Supply; NEPSE Index (search for similar items in EconPapers)
Date: 2018
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