The document presents a study analyzing the impact of macroeconomic variables on global stock market performance. It tests the hypothesis that GDP growth, inflation, and unemployment significantly impact stock market indices. Regression models show GDP growth and inflation have a significant, direct relationship with stock market changes. The study concludes macroeconomic factors robustly explain parts of stock market performance, allowing better understanding and guidance for investors.

1. IMPACT OF MACRO-ECONOMIC
VARIABLES IN
THE PERFORMANCE OF
GLOBAL STOCK MARKETS
Devanayagam
Econometrics Project Presentation 18th September 2014
www.twitter.com/Devanayagam
Email: deva.4356@gmail.com

2. Agenda
 Project Overview
 Hypothesis Listing
 Literature Review
 Testing of Hypothesis
 Comparison of models
 Global Stock markets
 Introduction
 Examples
 Dependent & Independent Variables
 Performance of global stock markets
 Significance of results
 Recommendations

3. Global Stock Performance Index (10 years: 2004-2014)

4. How much significance does the macro-economic
variables contribute to the performance of global
stock markets?

5. Do you know that the emerging markets
contribute to as much as 6% percent change in
YTD as of 2014 performance reports?!

6. The stock market index change in India is 24% in
YTD USD as of 2014 making it the biggest gainer
in Asia - Pacific

7. This project identifies the significance in stock
price changes with respect to change in macro-economic
variables in the world.

8. Hypothesis Testing
 Null Hypothesis (Ho)
 The macro-economic variables such as GDP growth rate, Inflation change and
unemployment rate do not have significant impact in the performance of stock
market indices.
 Alternate Hypothesis (H1)
 The macro-economic variables such as GDP growth rate, Inflation change and
unemployment rate have significant impact in the performance of stock market
indices.

9. Literature Review
 ͒Tˊˇ capital market promotes economic growth and prosperity by providing an investment
channel that contributes to attract domestic and foreign capital.͓ (Sangmi, Mohi-u-Din, Macro-economic
variables on Stock Market Interactions: The Indian Experience, Kashmir University, May-June 2013)
 ͒However, interest in investing in emerging markets has grown considerably over the past
decade. Harvey (1995a) shows that returns and risks in Emerging Stock Markets have been
found to be higher, relative to developed markets.͓ (Bayzeid, Muhammad, Impact of Micro and
Macroeconomic Variables on ESM Return: A case on Dhaka Stock Exchange, Jagannath University, May 2011)
 ͒The rational expectations hypothesis offered a new perspective on the formation of prices.
The general idea behind this hypothesis is that economic agents use both past experiences
aːˆ ˖ˊˇˋ˔ ˇ˚˒ˇ˅˖a˖ˋˑː˕ aːˆ ˒˔ˇˆˋ˅˖ˋˑː˕ ˑˈ ˖ˊˇ ˈ˗˖˗˔ˇ ˖ˑ ˆˇ˖ˇ˔ˏˋːˇ ˖ˊˇ ˒˔ˋ˅ˇ ˑˈ aː a˕˕ˇ˖ ˖ˑˆa˛.͓
(Taulbee, Nathan, Influences of the Stock Market, An Examination of the effect of economic variables on the S&P 500,
January 2014)
 ͒The study of Robert Johnson (2010) shows significant and direct relationship between inflation
and real output. Relationship between stock index and real output in current period is positive
aːˆ ˕ˋˉːˋˈˋ˅aː˖.͓ (Salman Khan, Muhammad, Macro-economic Variables & its impact on KSE-100 Index,
November 2013)

10. Global Stock Markets - Introduction
͒A stock market or equity market is the aggregation of buyers and sellers, a loose network of economic transactions, not
a physical facility or discrete entity, of stocks (also called shares); these may include securities listed on a stock
exchange a˕ ˙ˇˎˎ a˕ ˖ˊˑ˕ˇ ˑːˎ˛ ˖˔aˆˇˆ ˒˔ˋ˘a˖ˇˎ˛.͓

11. Comparison of Global stock market performances

12. World's 40 best-performing stock markets in 2013
Source: money.cnn.com

13. Emerging Stock Markets (ESMs) : Stock Market performance

14. World’s Largest Stock Exchanges (based on Market Cap)
 With technology advancing and barriers to entry falling just as rapidly, the exchange
game is a dynamic industry these days.
 Emerging markets are on the rise, but in terms of overall market capitalization, the
historical powers are still the largest.
 All data are from the World Federation of Exchanges' 2013 market report.
 Here we list the top 5. Here we go..

15. 1. New York Stock Exchange (NYSE), US
Market Cap: $13.4 trillion

16. 2. NASDAQ
Market Cap: $3.9 trillion

17. 3. Tokyo Stock Exchange
Market Cap: $3.8 trillion

18. 4. London Stock Exchange
Market Cap: $3.6 trillion

19. 5. Euro Next
Market Cap: $2.9 trillion

20. Project Data
 Sample Size: 53 (top performing 53 effective and regulated stock exchanges in the
world)
 Spread across 49 countries around the world
 Indices: Yearly change of stock price indices
 Other Data
 Population
 GDP (in USD)
 GDP Growth Rate
 GDP Per Capita
 Inflation (consumer prices)
 Unemployment rate (long term unemployment)
Source: worldbank.org/indicators

21. Dependent and Independent Variables
 Dependent Variable
 Yearly change in global stock market indices
 Independent Variables (yearly change)
 GDP growth rate
 Inflation change (consumer prices)
 Unemployment Rate change
 Development Status of nations
 GDP per capita change

22. Yearly Change in Global Stock Market Indices
 Global Stock exchanges are measured by Stock market indices which are influenced
by prevailing economic conditions of the respective country.
 A stock index or stock market index is a measurement of the value of a section of
the stock market. It is computed from the prices of selected stocks (typically
a weighted average).
 It is a tool used by investors and financial managers to describe the market, and to
compare the return on specific investments.
 Ex:

23. Independent Variables: 1. GDP Growth Rate
 Gross domestic product (GDP) is defined as "an aggregate measure of production
equal to the sum of the gross values added of all resident institutional units
engaged in production (plus any taxes, and minus any subsidies, on products not
ˋː˅ˎ˗ˆˇˆ ˋː ˖ˊˇ ˘aˎ˗ˇ ˑˈ ˖ˊˇˋ˔ ˑ˗˖˒˗˖˕).͒
World GDP
Annual Gorwth
rate (%) 2013:
2.2%
Graph source: worldbank.org/indicator

24. 2. Inflation Change (Consumer Prices)
Inflation is a sustained increase in the general price level of goods and services in
an economy over a period of time. When the general price level rises, each unit of currency buys
Graph source: worldbank.org/indicator
fewer goods and services.
World Inflation
(%) 2013: 2.7%

25. 3. GDP Per Capita Change
 A measure of the total output of a country that takes the gross domestic product
(GDP) and divides it by the number of people in the country.
 The per capita GDP is especially useful when comparing one country to another
because it shows the relative performance of the countries. A rise in per capita GDP
signals growth in the economy and tends to translate as an increase in productivity.
World GDP Per
Capita (USD)
2013: 10512.9
Graph source:
worldbank.org/indic
ator

26. Other Independent Variables
 4. Unemployment Rate (Yearly Change) 5. Development Status
World Unemployment Rate (%)
2013: 6.7%
Graph source: Bureau of Labour Statistics (BLS)
http://data.bls.gov/timeseries/LNS14000000
•Developed Countries
•(North America & Western Europe)
•Emerging Countries
•(Eastern Europe, Asia & Australia)
•Under-developed Countries
•(Africa)
Source: World Trade Organization,
http://www.wto.org/english/tratop_e/devel_e/d1who_e.
htm
The International Statistical Institute, http://www.isi-web.
org/component/content/article/5-root/root/81-
developing

27. Identification of most robust and relevant model for the case
Parameters Model 1
Linear Model
Model 2
Semi-log Model
Model 3
Quadratic Model
Model 4
Linear-Log Model
R-square 0.448 0.132 0.362 0.147
F-Stat 7.664 (0.000 sig) 9.657 (0.000 sig) 8.432 (0.000 sig) 7.998 (0.000 sig)
T-Stat 0.000 sig (4/5) 0.011 sig (2/5) 0.001 (3/5) 0.000 sig (3/5)
Normal Distribution Yes No Yes No
Auto-correlation No No No No
Heteroscedasticity No No No No
Durbin-Watson 2.366 2.549 3.618 3.766

28. Selected Linear Model – Regression Results

29. Linear Model results: Coefficient Table

30. Histogram & Normal P-P Plot

31. Significance of Results
 Based on the results, we could conclude that there is a significant and
direct relationship between stock exchange indices of the
world and the prevailing economic conditions or the values of macro-economic
variables.
 There is a robust model which defines the part of explained effect of macro-economic
variables such as GDP growth rate, Inflation change, Unemployment rate
and GDP per capita change (%) with respect to the change in stock exchange
indices
 From here, we could build a sustainable model to understand the stock market in a
broader way and guide numerous investors who depend on stable growth of the
market for their livelihood.

32. Recommendations
 Building a robust model for understanding the change in stock
exchange indices is mandatory.
 The changes in stock exchange indices is linear or directly related to
the macro-economic variables and through which we can identify an
investing pattern of the investors in the stock market.
 This model could also be implemented for improving the performance
of stock exchange across the world.

33. References
 World Bank, www.worldbank.org/indicator
 Sangmi, Mohi-u-Din, Macro-economic variables on Stock Market Interactions: The Indian
Experience, Kashmir University, May-June 2013
 Bayzeid, Muhammad, Impact of Micro and Macroeconomic Variables on ESM Return: A case on
Dhaka Stock Exchange, Jagannath University, May 2011
 Taulbee, Nathan, Influences of the Stock Market, An Examination of the effect of economic
variables on the S&P 500, January 2014
 Salman Khan, Muhammad, Macro-economic Variables & its impact on KSE-100 Index, November
2013
 World Trade Organization, http://www.wto.org/english/tratop_e/devel_e/d1who_e.htm
 The International Statistical Institute, http://www.isi-web.org/component/content/article/5-
root/root/81-developing
 Bureau of Labour Statistics (BLS) http://data.bls.gov/timeseries/LNS14000000
 Wikipedia.org & International Monetary Fund

34. Thank you! 