This article examines the dynamic relationship among the stock market and macroeconomic factors for the stock market of Nepal. The study documented both short-run and long-run interdependence among stock index and some macroeconomic variables. The estimated results suggest unidirectional short-run (positive) causal relationship running from consumer price index (CPI) to stock index but reverse causality in the long run (from stock index to CPI), supporting the widely-held view that stock returns are a hedge against inflation. The multivariate results also confirmed absence of long-run causality but supported positive and unidirectional relationship flowing from money supply to stock index in the short run. Nevertheless, the multivariate results revealed longrun causality running from stock index to treasury bill rate but no short-run linkage. The variance decompositions results showed a strong relative exogeneity of stock index, while the impulse response graphs showed that the response of stock index to shocks in macroeconomic variables didn’t persist for long period. The policy implication of the study is that monetary authority in Nepal would be able to influence the stock market only in the short run, but not in the long run, either directly through its intermediate target (money supply) and its impact on the inflation or indirectly through increased access to the financial services.
Abdullah, D.A. and S.C. Hayworth (1993), ‘ Macro econometrics of Stock Market Fluctuations ’, Quarterly Journal of Business and Economics, 32(1): 50–67 .
2.
Al-Khazali, O.M. (2003), ‘ Stock Prices, Inflation, and Output: Evidence from Emerging Markets ’, Journal of Emerging Finance, 2(3): 287–314 .
3.
Bodie, Z. (1976), ‘ Common Stocks as a Hedge against Inflation ’, Journal of Finance, 31(2): 459–70 .
4.
Cohn, R.A. and D.E. Lessard (1981), ‘ The Effect of Inflation on Stock Prices: International Evidence ’, Journal of Finance, 36(2): 277–89 .
5.
Cooper, R.V.L. (1974), ‘ Efficient Capital Markets and the Quantity Theory of Money ’, Journal of Finance, 29(3): 887–908 .
6.
Cornell, B. (1983), ‘ The Money Supply Announcements Puzzle: Review and Interpretation ’, American Economic Review, 73(4): 644–57 .
7.
Crowder, W.J. (2006), ‘ The Interaction of Monetary Policy and Stock Returns ’, The Journal of Financial Research, 39(4): 523–35 .
8.
Fama, E.F. (1981), ‘ Stock Returns, Real Activity, Inflation, and Money ’, American Economic Review, 71(4): 545–65 .
9.
Fama, E.F. (1990), ‘ Stock Returns, Expected Returns and Real Activity ’, Journal of Finance, 45(4): 1089–108 .
10.
Fama, E.F. and G.W. Schwert (1977), ‘ Asset Returns and Inflation ’, Journal of Financial Economics, 5(2): 115–46 .
11.
Ferrari, A. , G. Jaffrin and S.R. Shrestha (2006), Access to Financial Services in Nepal. Washington D.C: The World Bank .
12.
Firth, M. (1979), ‘ The Relationship between Stock Market Returns and Rates of Inflation ’, The Journal of Finance, 34(3): 743–49 .
13.
Fisher, I. (1930), The Theory of Interest. New York: MacMillan .
14.
Geske, R. and R. Roll (1983), ‘ The Fiscal and Monetary Linkage between Stock Returns and Inflation ’, Journal of Finance, 38(1): 1–33 .
15.
Ginting, E. (2007), ‘Is Inflation in India an Attractor of Inflation in Nepal?’ Working Paper, IMF .
16.
Gultekin, N.B. (1983), ‘ Stock Market Returns and Inflation: Evidence from Other Countries ’, Journal of Finance, 38(1): 49–65 .
17.
Gunasekarge, A. , A. Pisedtalasai and M. Power (2004), ‘ Macroeconomic Influence on the Stock Market: Evidence from and Emerging Market in South Asia ’, Journal of Emerging Finance, 3(3): 285–304 .
18.
Hamburger, M.J. and L.A. Kochin (1972), ‘ Money and Stock Prices: The Channels of Influence ’, Journal of Finance, 27(2): 231–49 .
19.
Homa, K.E. and D.M. Jaffee (1971), ‘ The Supply of Money and Common Stock Prices ’, Journal of Finance, 26(5): 1056–66 .
20.
Jaffe, J.F. and G. Mandelker (1976), ‘ The “Fisher Effect” for Risky Assets: An Empirical Investigation ’, Journal of Finance, 31(2): 447–58 .
21.
Jensen, G.R. and R.R. Johnson (1995), ‘ Discount Rate Changes and Security Returns in the U.S., 1962–1991 ’, Journal of Banking and Finance, 19(1): 79–95 .
22.
Johansen, S. and K. Juselius (1990), ‘ Maximum Likelihood Estimation and Inferences on Cointegration with Applications to the Demand for Money ’, Oxford Bulletin of Economics and Statistics, 52(2): 169–210 .
23.
Joshi, N.K. and F.B. K.C. (2005), ‘ The Nepalese Stock Market: Efficiency and Calendar Anomalies ’, Economic Review, 17: 40–85 .
24.
Kaul, G. (1987), ‘ Stock Returns and Inflation: The Role of the Monetary Sector ’, Journal of Financial Economics, 18(2): 253–76 .
25.
Kaul, G. (1990), ‘ Monetary Regimes and the Relation between Stock Returns and Inflationary Expectations ’, Journal of Financial and Quantitative Analysis, 25(3): 307–21 .
26.
Laopodis, N.T. (2006), ‘ Dynamic Interactions among the Stock Market, Federal Funds Rate, Inflation and Economic Activity ’, The Financial Review, 41(4): 513–45 .
27.
Lee, B.S. (1992), ‘ Causal Relations among Stock Returns, Interest Rates, Real Activity, and Inflation ’, Journal of Finance, 47(4): 1591–603 .
28.
Lee, U. (1997), ‘ Stock Market and Macroeconomic Policies: New Evidence from Pacific Basin Countries ’, Multinational Finance Journal, 1(4): 273–89 .
29.
Lintner, J. (1975), ‘ Inflation and Security Returns ’, Journal of Finance, 30(2): 259–80 .
30.
Mackinnon, J.G. (1996), ‘ Numerical Distribution Functions for Unit Root and Cointegration Tests ’, Journal of Applied Econometrics, 11(6): 601–18 .
31.
Masih, A.M.M. and R. Masih (1996), ‘ Modeling the Dynamics of Macroeconomic Activitiy: New Evidence from a Developing Economy ’, Journal of Quantitative Economics, 12(2): 85–105 .
32.
Mookerjee, R. and Q. Yu (1997), ‘ Macroeconomic Variables and Stock Prices in a Small Open Economy ’, Pacific-Basin Finance Journal, 5(3): 377–88 .
33.
Nelson, C.R. (1976), ‘ Inflation and Rates of Return on Common Stocks ’, Journal of Finance, 31(2): 471–83 .
34.
Nepal Rastra Bank (NRB) (2007), Inflation in Nepal. Kathmandu: Nepal Rastra Bank .
Osterwald-Lenum, M. (1992), ‘ A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics ’, Oxford Bulletin of Economics and Statistics, 54(3): 461–72 .
37.
Park, K. and R.A. Ratti (2000), ‘ Real Activity, Inflation, Stock Returns, and Monetary Policy ’, The Financial Review, 35(2): 59–77 .
38.
Pearce, D.K. and V.V. Roley (1983), ‘ The Reaction of Stock Prices to Unanticipated Changes in Money: A Note ’, Journal of Finance, 38(5): 1323–33 .
39.
Pandey, R.P. (2005), ‘Inflation’ Nepal Rastra Bank in Fifty Years. Nepal Rastra Bank: Kathmandu .
40.
Quarterly Economic Bulletin. (Fiscal year 1996/1997–2006/2007) . Kathmandu: Nepal Rastra Bank .
41.
Rahaman, A.A. , N.Z.M. Sidek and F.H. Tafri (2009), ‘ Macroeconomic Determinants of Malaysian Stock Market ’, African Journal of Business Management, 3(3): 95–106 .
42.
Ram, R. and D.E. Spencer (1983), ‘ Stock Returns, Real Activity, Inflation, and Money: Comment ’, American Economic Review, 73(3): 463–70 .
43.
Rogalski, R.J. and J.D. Vinso (1977), ‘ Stock Returns, Money Supply, and the Direction of Causality ’, Journal of Finance, 32(4): 1017–30 .
44.
Rozeff, M.S. (1974), ‘ Money and Stock Prices ’, Journal of Financial Economics, 1(3): 245–302 .
45.
Schwert, G.W. (1981), ‘ The Adjustment of Stock Prices to Information about Inflation ’, Journal of Finance, 36(1): 15–29 .
46.
Sellin, P. and S. Riksbank (2001), ‘ Monetary Policy and the Stock Market: Theory and Empirical Evidence ’, Journal of Economic Surveys, 15(4): 491–551 .
47.
Shrestha, S.R. (2005), ‘Open Market Operations’ Nepal Rastra Bank in Fifty Years. Kathmandu: Nepal Rastra Bank .
48.
Solnik, B. (1983), ‘ The Relation between Stock Prices and Inflationary Expectations: The International Evidence ’, Journal of Finance, 38(1): 35–48 .
49.
Tsoukalas, D. (2003), ‘ Macroeconomic Factors and Stock Prices in the Emerging Cypriot Equity Market ’, Managerial Finance, 29(4): 87–92 .
50.
Wald, R.N. (1970), ‘ Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the “Announcement Effect” ’, Econometrica, 38(2): 231–50 .
51.
Wickremasinghe, G.B. (2006), ‘Macroeconomic Forces and Stock Prices: Some Empirical Evidence from an Emerging Market’. Working Paper, University of Wollongong .
