The Relationship between Stock Prices and Macroeconomic Variables

Abstract

The purpose of this study is to examine the relationship between the stock market movement and the macroeconomic variables in Mongolia and Korea. It is interesting and important to understand the relationship between the stock market and the macroeconomic variables of Mongolia as a just developing stock market. Firstly, I will describe the theoretical studies of the Mongolian and Korean stock market and analyze them. The analysis is based on the Engle Granger methodology with the framework of the Vector Error Correction Model (VECM). To do this, first, the stationary of the variables is tested by performing Unit root test. For this purpose, I will use the Augmented Dickey Fuller (ADF) test and the Phillips ? Perron test. Then, I will examine the cointegration analysis suggested by Johansen. Finally, the causal relations are examined through the VECM. The data are based on the period from January, 2000 to December, 2009 in the case of Mongolia, and from January, 2002 to December, 2009 in the case of Korea. Variables include the Consumer price index (CPI), Interest rate of one year savings (IR), Money supply (M2) and Exchange rates: US dollar for both countries and Korean won for the case of Mongolia. The study concludes that there are a long-run relationship between the stock market and macroeconomic environment, in the two countries. The unit root test results show that all variables are non-stationary at level, but they are stationary at first difference. To see a cointegration, the Johansen cointegration test is performed. Trace test and Maximal ? Eigenvalue test are used for detecting the presence of the number of cointegrating vector. The findings of Johansen cointegration test show that there is one cointegration in Mongolian data, and two cointegrations in Korean data. From the Granger causality test results, Mongolian stock prices cause to the money supply and CPI. In the case of Korea, there are bidirectional causality between the stock prices and the interest rate. Therefore, all macroeconomic variables cause to the stock price by unidirectional way.