Macroeconomics forex trading Dubai
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April 15, ; Accepted Date: May 23, ; Published Date: J Stock Forex Trad 4: This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in macroeconomics forex trading dubai medium, provided the original author and source are credited.
The study investigates the nature of the causal relationships between stock prices and the key macro economic variables in BRIC countries. The empirical evidence shows that long-run and short-run relationship exists between macro economic variables and stock prices, but this relationship was not consistent for all of the BRIC countries.
The security price movements are closely related to economic activity level. According to the Efficient Market Hypothesis EMH [ 1 ], an efficient capital market is one in which stock prices change rapidly as the new information becomes available [ 2 ]. Several studies have found a correlation between changes in macroeconomics forex trading dubai economy and macro economic variables.
These studies also suggest that the movement of stock market indices is highly sensitive to the changes in the fundamentals of the economy and to the changes in the expectation about future prospects [ 3 ]. Stock price fluctuations are as old macroeconomics forex trading dubai the stock market themselves. And yet those prices are essential factors in investment decisions, which are fundamental to the economy.
Corporate investment is much more volatile than aggregate gross domestic production GDPand it appears to be an important driver of economic fluctuations [ 4 ]. Hence one cannot even rule out the role of economic activities and information fed to the market completely. This was also supported by Taleb [ 6 ] and Akerlof [ 4 ] and Shiller studies [ 7 ]. Most of the studies in the area have been conducted for developed economies though recent literature deals with emerging markets.
Empirical researchers have tried to identify determinants of stock prices. The studies on stock prices are mainly macroeconomics forex trading dubai. First, contemporary financial theory asserts that stock macroeconomics forex trading dubai are closely related to the movements of macro variables [ 89 ]. This is because the stock prices reflect fundamental information macroeconomics forex trading dubai the macro economy. The relations between exchange rate movements and stock prices are based on the rise in the domestic interest rate that leads to capital inflows and makes the exchange rate appreciate.
This currency appreciation has a negative effect on stock prices of export dominant industries because of reduction in exports, while currency appreciation boosts the stock market positive effect on stock prices for import of dominant industries due to increase in imports.
The weakness of Rupee has cascading effect on equity returns of investors who buy stocks with dollars. In the absence of full convertibility, Foreign Institutional Investors FII has to convert their dollars into rupees to buy stocks here and do the macroeconomics forex trading dubai while selling.
FII investments bring in global liquidity into the equity markets and raise the price-earnings ratio and thereby reduce the cost of capital domestically. FII Investment inflows help supplement domestic savings and smoothen inter-temporal consumption.
Numerous studies have been conducted macroeconomics forex trading dubai developed capital markets macroeconomics forex trading dubai regard to the relationship between stock prices and interest rates. The results of most of the studies suggest that stock and bond returns are predictable and that one can be used to forecast the other. In general, whenever the interest rate on treasury securities rises, investors tend to switch out of stocks, causing stock prices to fall.
Therefore, the identifying factors that affect stock prices is an imperative task on various counts. Another approach to explain the stock prices is to assume the relationship between stock macroeconomics forex trading dubai in one market or a group of markets and international economic environments such as stock prices and macroeconomics forex trading dubai and interest rates in other related economies including developed markets. All the above considerations motivated to conduct this research study in the Indian context.
The study investigates the nature of the causal relationships between stock prices macroeconomics forex trading dubai the key macro-economic variables in India for the period April, to July, using monthly data. Macroeconomics forex trading dubai data was collected for India from www. A depository has become operational for scripless trading and the regulatory structure has been overhauled with most of the powers for macroeconomics forex trading dubai the capital market vested with the SEBI.
The variables identified for the study have been derived from both theory and practice. Gold price is included in the macroeconomics forex trading dubai as an additional variable, to examine whether gold price contains any additional significant information about price movements. Since gold is an important saving instrument in India, and is very often used as a hedge against inflation, it is expected that gold may be looked upon as alternative asset for those holding idle money, for speculative purposes.
Monthly data series for the period from April to July is used in this study. Monthly data series for the period from August to July is used in this study. The stock price indices, representing different countries, are selected based on the importance of index.
Due to data constraints we need to drop some important variables For Ex: Autoregressive distributed lag ARDL approach and Toda and Yamamoto Granger causality test have been applied to explore the longrun and short-run relationships.
Cointegration and error-correction approaches are used in this study to examine the short-run and longrun relationship macroeconomic variables and stock prices. There are many techniques available in economic literature to investigate cointegration relationship among macroeconomic variables. In the present study, the auto regressive distributed lag ARDL approach to cointegration, developed by Pesaran et al.
This approach, also known as the ARDL bounds the test approach, which is preferred over other conventional cointegration tests, as it has several advantages over other conventional tests [ 16 ]. Investigation of a cointegration relationship using the ARDL approach does not necessitate testing for a unit root.
But this is on account of the fact that bound test is based on the assumption of variables being I 0 or I 1. Therefore, the implementation of unit root tests for the ARDL approach might still be necessary macroeconomics forex trading dubai order to ensure that none of the variables are integrated of order two [I 2 ] or beyond. To that end, we apply different unit root tests to both real effective exchange rate and nominal exchange rate.
The standard augmented Dickey Fuller ADF and Phillips Perron PP unit root tests have been criticized for its low power in distinguishing between macroeconomics forex trading dubai root and a near unit root process [ 17 ]. Therefore, we have also performed Kwiatkowski, Phillips, Schmidt and Shin KPSS macroeconomics forex trading dubai 18 ] unit root test, as it is more powerful and reliable for small sample data sets as in our study. The results on variables at level are given in Table 1which on the whole shows that the variables under study may be considered integrated of order one, i.
However, note that in these two cases also, all the three tests fail partially; for example, both the ADF and PP tests without intercept and constant; and the KPSS test with intercept.
With our preliminary conclusion that the variables in general are integrated, we consider that the tests in the first macroeconomics forex trading dubai of the variables Table 2 confirm that all the variables are I 1 and both the ADF and PP tests are rejecting the unit root null and the KPSS tests fail to reject the stationarity null in contrast to all the variables in all the test formulations.
Asymptotic critical values for KPSS test: Kwiatkowski-Phillips-Schmidt-ShinTable 1. In order to implement the ARDL test, we have to determine the appropriate lags as the results are very sensitive to the lag length. To ensure comparability of results for different lag lengths, all estimations were computed over the same sample period and so lag order of 1 macroeconomics forex trading dubai selected based on the lowest value of the Akaike Information Criterion.
After deciding the optimal lag order, the results of F-statistics are reported in Table 3. These results are tentatively confirming the existence of long-run equilibrium relationship among the variables used for all the individual BRIC Stock markets. We further probe into the long run and the short run dynamics. The results of the long run coefficients are presented in Table 4. It implies that money supply, inflation and gold prices have the long-run relationship with the Sensex.
The results facilitate the investors in taking informative and effective investment decisions by estimating the expected trends of the important macro variables. Similarly, the Central macroeconomics forex trading dubai Reserve bank of India should consider that significant impact of money supply on stock prices.
According to efficient market hypothesis, stock markets respond to the arrival of new information which comes randomly. Hence, macroeconomic policies should be designed to provide stability to the stock market. Due to increase in the volume of foreign institutional investment FIIinflows in recent times have macroeconomics forex trading dubai to concerns regarding the volatility of these flows and its impact on the stock markets. Traditionally equities have been regarded as a good hedge against inflation because of the fact that macroeconomics forex trading dubai are claimed against physical assets whose real returns should remain unaffected by inflation.
Investors need to know macroeconomics forex trading dubai equities can serve as a hedge against inflation. If a company is able to sustain its profit margin despite high inflation, then the stock price is macroeconomics forex trading dubai to hold. If the high inflation sustains, at some stage it will lead to a chain reaction across the economy, pushing up interest rates and even affecting demand.
An increase in interest rates will push up borrowing costs for corporate while lower demand will hurt growth in revenues. This is likely to impact sentiment for the stock market as a whole. Traditionally, gold has been more attractive than bank deposits, stocks and bonds. In developing countries, people have often trusted gold as a better investment.
According to Opdyke [ 19 ], the international investors sought a safe haven investment as gold during the global recession in the history.
Moreover, during the global financial instability gold may pull the interest of investors, because there will be a little chance of getting better returns macroeconomics forex trading dubai the stock investments due to fragile economic and financial positions in the global economy. It means that interest rates TBR have an impact on stock prices, especially in the long run. Zhou  found that long-term interest rate explains a major part of the variation in price-dividend ratios and suggests that the high volatility of the stock market is related to the high volatility of long-term bond yields and may be accounted for by changing forecasts of discount rates.
While in the case of China, no variable appears to be significant. In Russia, the only variable namely, Index of Industrial production has impact on Russian stock market at 10 percent level. The Index of industrial production, which has macroeconomics forex trading dubai taken as a proxy of national income, should increase the corporate earnings enhancing the present value of the firm and it also increases the national disposable income, which should lead to more retail investment in the stock market.
The opposite will cause a fall in the stock market. As we mentioned earlier, due to data constraints we had to drop some important variables For Example: In this scenario, empirical results are not unexpected for China and Russia, as other macroeconomic variables may have a major role in the determination of stock price expectations.
In order to capture macroeconomics forex trading dubai short-run dynamics of the model, error correction mechanism was applied and the macroeconomics forex trading dubai are reported in the Table 5. The ECM coefficients should be statistically significant with a negative sign. The results show that the ECM term, has negative sign and is statistically significant at 5 percent level, ensuring that long-run equilibrium can be attained in the case of India and Brazil only. The magnitude of the coefficient of the ECM term suggests that adjustment process is highly significant for India and quite moderate for Brazil.
Thus, about 84 percent of disequilibrium of the previous month shock is adjusted back to equilibrium in the current month for India and about 9 percent for Brazil. The ECM term of China and Russia are not statistically significant, which shows that the macro economic variables do not have impact on stock prices even in the short-run.
Perhaps, the omitted variables may have had some say on the result. Remember we have already mentioned the data limitation problems in the case of these two countries.
Further research into the relationship between these for example: Macroeconomics forex trading dubai, to ascertain the goodness of the fit of the selected ARDL model, the stability and the diagnostic tests are conducted. However, that the serial correlation tests are only marginally significant macroeconomics forex trading dubai significant at 10 macroeconomics forex trading dubai level except for India.