Inter-relationship between Stock Markets and Macroeconomy
Establishing the causal relationships and interactions among macroeconomic variables and stock exchange prices is important to the implementation of risk management policies. Determination of both causal relationships and the interactions among them are useful to the minimization of the financial market risks.
There are number of factors contributing to this promising condition in the stock market. These factors include expansion in the country’s economic activities, strength in the exchange rate, and decrease in lending interest rates and improvement in recovery of outstanding loans, rescheduling and payment of foreign debts, large scale mergers and acquisitions, better relationship with the other countries.
Various studies have been conducted with the stock market index representing prices of all shares macro-economic indicators being represented by money supply, index of industrial production, exchange rate, inflation and balance of trade. However such studies have concluded with conflicting results on the inter-relationship.