DETERMINATION OF STOCK MARKET PERFORMANCE: A MACRO PERFORMANCE PERSPECTIVE

Abstract

Abstract: Stock markets play a pivotal role in modern economies by facilitating capital formation, enhancing liquidity, and enabling efficient allocation of financial resources across sectors. They also serve as forward-looking barometers of economic performance, reflecting investors’ expectations about future growth, corporate profitability, and macroeconomic stability. Despite their importance, stock markets remain highly sensitive to fluctuations in macroeconomic conditions such as inflation, interest rates, exchange rates, and economic growth, which can induce volatility and uncertainty in returns.[1]The existing literature provides extensive evidence on the relationship between macroeconomic variables and stock market performance; however, findings remain inconclusive and often context-specific. Some studies support a strong linkage consistent with the Arbitrage Pricing Theory, while others find weak or unstable relationships across time and markets.[2]This inconsistency highlights a critical research gap: the lack of a comprehensive macro-performance framework that simultaneously captures both short-run dynamics and long-run equilibrium relationships in a unified empirical setting. Furthermore, many prior studies focus on single-country analyses or limited variables, thereby restricting the generalizability and robustness of their conclusions.[3]

Against this backdrop, the present study aims to systematically examine the determinants of stock market performance from a macroeconomic perspective. The primary objectives are threefold: (i) to identify key macroeconomic indicators influencing stock market performance, (ii) to analyse the nature of both short-run and long-run relationships between these variables, and (iii) to assess the direction of causality and predictive power of macroeconomic factors on stock returns. To achieve these objectives, the study employs time-series data spanning a specified period (e.g., 2000–2024), sourced from reliable databases such as the World Bank, International Monetary Fund, and national financial authorities. Stock market performance is proxied by a major stock index, while macroeconomic variables include gross domestic product (GDP), inflation rate, interest rate, and exchange rate. The empirical methodology integrates advanced econometric techniques, including unit root tests (Augmented Dickey-Fuller and Phillips-Perron), cointegration analysis (Johansen or ARDL bounds testing), and error correction modelling to capture both long-term equilibrium relationships and short-term adjustments. Additionally, Granger causality tests are applied to determine directional influences among variables.

The expected findings suggest that macroeconomic fundamentals exert significant influence on stock market performance, though the magnitude and direction of effects may vary across variables and time horizons. For instance, inflation and interest rates are anticipated to have a negative impact on stock returns, while economic growth may exhibit a positive association. Exchange rate movements may show mixed effects depending on market structure and external exposure.[4] This study contributes to the existing body of knowledge by offering a comprehensive and integrative macroeconomic framework for analysing stock market performance. It enhances empirical understanding by combining multiple econometric approaches and providing robust evidence on dynamic relationships. From a policy perspective, the findings offer valuable insights for monetary authorities, financial regulators, and investors by highlighting the importance of macroeconomic stability in fostering efficient and resilient stock markets.[5]