An Empirical Analysis of the Relationship between Macroeconomic Variables and Stock Prices in Bangladesh

Establishing the relationship between stock prices and macroeconomic variables is very important for formulating current economic stabilisation policies. This paper investigates the causal relationship between four macroeconomic variables and Dhaka Stock Exchange (DSE) stock prices using cointegration and Granger causality test. The results suggest that cointegration exists between stock prices with each of the variables: M1, M2 and inflation rate, indicating a long-run relationship exists between them. We find evidence that unidirectional causality exists from stock market to exchange rate and M1 in the short run. From bivariate Error-Correction models we also find that long run causality exists from M1, M2 to stock market and from stock market to inflation rate. These results are further strengthened when we expand the analysis for multivariate settings. Here, we also note some evidence that M2 Granger-cause stock price and the three macroeconomic variables. These results strongly suggest informational inefficiency in DSE market.