Macroeconomic Variables and Stock Returns in Bangladesh: An Empirical Analysis in The Presence of Structural Breaks

K.M. Zahidul Islam, Yeasmin Akter and MD. Nahid Alam ()
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K.M. Zahidul Islam, Yeasmin Akter and MD. Nahid Alam: Jahangirnagar University and Bangladesh University of Professionals

Journal of Economic Development, 2020, vol. 45, issue 2, 115-141

Abstract: This paper examines the long-run relationship between stock market indices in Bangladesh using exchange rate (ER), domestic credit provided by banks (DCB), industrial production index (IPI), and crude oil price (COP) in the presence of structural breaks. The study used time series data from 2009 to 2017 and applied ARDL bounds testing approach. Both conventional unit root and unit root tests in the presence of structural breakpoints are conducted. ARDL bounds testing approach confirms the presence of a long-run relationship among the selected variables and the stock market crash of 2010 and oil price shock of 2011 are found to have a significant effect on the stock price fluctuations in both stock exchanges in Bangladesh. The error correction term suggests that 43.3% of the disequilibrium in Dhaka Stock Exchange (DSE) returns is adjusted monthly to get back to the long-run equilibrium, whereas the value is 34.9% for Chittagong Stock Exchange (CSE). Moreover, ER, DCB, and COP have a significant positive impact on stock prices for both stock exchanges. The policy guideline of this study is that the regulators in foreign exchange market, banking sector, and capital market should work together to make prudential regulatory framework with a view to transforming both stock exchanges into a robust one within the South Asian region.

Keywords: Stock Market; Macroeconomic Variables; Bangladesh; Structural Break; ARDL; Cointegration (search for similar items in EconPapers)
JEL-codes: C13 C51 G14 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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