Impact of Foreign Exchange Reserve, Exchange Rate and Crude Oil Price on Dhaka Stock Exchange Index: An Empirical Evidence from Vector Error Correction Model
Keywords:
Crude Oil Price, DSE Index, Exchange Rate, Foreign Exchange Reserve, VECM.
Abstract
The supreme thrust of the present analysis is to explore the influences of foreign exchange reserve, exchange rate, and crude oil price on the stock index of the Dhaka stock exchange (DSE) of Bangladesh. Moreover, this study evaluates the identity of any unpremeditated relationship among the variables from the viewpoint of an emerging country like Bangladesh. Through using monthly time-series data, this study tries to discover the evidence of a long-run affiliation among the variables by using Johansen’s Cointegration test and Vector Error Correction Model (VECM). Besides, the Granger Causality technique is introduced to examine the casualty among variables where the empirical results show a causal linkage between the Dhaka stock exchange index, foreign exchange reserve, and exchange rate, moving only in one way from Dhaka stock exchange index to foreign exchange reserve and exchange rate. In contrast, no causal link was identified between Dhaka stock exchange indexes and crude oil prices. Lastly, Impulse Response Function suggests a permanent effect of all selected macroeconomic factors on the Dhaka stock exchange index in the long run and Variance Decomposition Analysis settles that, the reform in Dhaka stock exchange index can be caused by the innovation in foreign exchange reserve, exchange rate, and crude oil price.
References
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Masuduzzaman, M. (2013). Impact of Macroeconomic Variables on the Stock Market Returns in Bangladesh: Does a Meaningful Impact Exist? Ministry of Finance Finance Division, 1–17.
Mezui, C. A. M., & Duru, U. (2013). Holding Excess Foreign Reserves Versus Infrastructure Finance : What Should Africa Do ?
Miller, J. I., & Ratti, R. A. (2009). Crude oil and stock markets: Stability, instability, and bubbles. Energy Economics, 31(4), 559–568. https://doi.org/https://doi.org/10.1016/j.eneco.2009.01.009
Ndlovu, B., Faisal, F., Resatoglu, N. G. R., & Türsoy, T. T. (2018). The Impact of Macroeconomic Variables on Stock Returns: A Case of the Johannesburg Stock Exchange. Romanian Statistical Review, 87–104. https://doi.org/10.18032/kaaba.2017.30.1.33
Phillips, P. C. B., & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75(2), 335–346. https://doi.org/10.2307/2336182
Ray, S. (2012). Foreign Exchange Reserve and its Impact on Stock Market Capitalization : Evidence from India. 2(2), 46–61.
Shafi, K., Hua, L., Idrees, Z., & Nazeer, A. (2015). Oil prices & stock market : Evidence from KSE & BSE. American Journal of Business, Economics and Management, 3(2), 40–44.
Zaidi, I., Ahmed, R. M. A., & Siok, K. S. (2017). Examining the relationship between economic growth, energy consumption and Co2 emission using inverse function regression. Applied Ecology and Environmental Research, 15(1), 473–484. https://doi.org/10.15666/aeer/1501_473484
Aigbovo, O., & Izekor, A. O. (2015). The impact of macroeconomic variables on stock market index in Nigeria. African Journal of Management Sciences, 1(1), 18–40.
Akinlo, O. O. (2015). Impact of Foreign Exchange Reserves on Nigerian Stock Market. The International Journal of Business and Finance Research, 9(2), 69–76. Retrieved from https://econpapers.repec.org/RePEc:ibf:ijbfre:v:9:y:2015:i:2:p:69-76
Ali, M. B. (2013). The Impact Of Selected Micro And Macroeconomic Variables On The Stock Prices Of Emerging Stock Market : A Case Of Dhaka Stock Exchange ( DSE ). Dhaka.
Bangladesh Bank. (2019). Monthly Economic Trend. https://www.bb.org.bd/econdata/index.php
Chauque, D. F. F., & Rayappan, P. A. (2018). The Impact of Macroeconomic Variables on Stock Market Performance: A Case of Malaysia. Edelweiss Applied Science and Technology, 2(1), 100–104. https://doi.org/10.33805/2576.8484.122
Dhaoui, A., & Kheraief, N. (2014). Empirical Linkage between Oil Price and Stock Market Returns and Volatility: Evidence from International Developed Markets. Economics Discussion Papers.
Dickey, D. A., & Fuller, W. A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica, 49(4), 1057–1072. https://doi.org/10.2307/1912517
Dornbusch, R., & Fischer, S. (1980). Exchange Rates and the Current Account. American Economic Review, 70(5), 960–971. Retrieved from https://econpapers.repec.org/RePEc:aea:aecrev:v:70:y:1980:i:5:p:960-71
Fauziah, F., Moeljadi, M., & Ratnawati, K. (2015). Dynamic Relationship Between Exchange Rates and Stock Prices in Asia, 2009-2013. Journal of Economics Finance and Accounting, 2(1), 124–134.
Frankel, J. (1993). Monetary and Portfolio-Balance Models of Exchange Rate Determination. In Economic Interdependence and Flexible Exchange Rates. Retrieved from http://www.hks.harvard.edu/fs/jfrankel/Monetary&PB Models ExRateDetermtn.pdf
Giri, A. K., & Joshi, P. (2017). The impact of macroeconomic indicators on Indian stock prices: An empirical analysis. Studies in Business and Economics, 12(1), 61–78. https://doi.org/https://doi.org/10.1515/sbe-2017-0005
Hasan, M. T. (2018). Impact of Foreign Exchange Reserve on Stock Market Development: Evidence from Dhaka Stock Exchange. Journal of Business Studies, 39(2), 19–30.
Hossain, M. K., Hossain, A., & Sadi, R. (2013). An Examination of the Relationship between Stock Market and Economic Growth: A Study in Malaysia. Journal of Transformative Entrepreneurship, 1(2), 124–133.
Hosseini, S. M., Ahmad, Z., & Lai, Y. W. (2011). The Role of Macroeconomic Variables on Stock Market Index in China and India. International Journal of Economics and Finance, 3(6), 235–243.
Hsing, Y. (2014). Impacts of Macroeconomic Factors on the Stock Market in Estonia. Journal of Economics and Development Studies, 2(2), 23–31.
International Monetary Fund. (2019). Retrieved from https://www.imf.org/en/Research/commodity-prices
Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration — With Applications To The Demand For Money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210. https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x
Kamande, M. N. (2015). Macroeconomic Variables and Stock Market Return in Nairobi Securities Exchange. Nairobi.
Keat, L. Y., Ling, N. Y., Yi, S. C., & Yee, T. L. (2017). The Relationship between Macroeconomic Variables and Stock Market Performance in Thailand. Thailand.
Khalid, W., & Khan, S. (2017). Effects of Macroeconomic Variables on the Stock Market Volatility: The Pakistan Experience. International Journal of Econometrics and Financial Management, 5(2), 42–59. https://doi.org/10.12691/ijefm-5-2-4
Khan, J., & Khan, I. (2018). The Impact of Macroeconomic Variables on Stock Prices: A Case Study of Karachi Stock Exchange. Journal of Economics and Sustainable Development, 9(13), 15–25. https://doi.org/10.5901/mjss.2012.v3n3p295
Khan, M. M., & Yousuf, A. S. (2013). Macroeconomic Forces and Stock Prices: Evidence from the Bangladesh Stock Market.
Khan, M. T., Khan, A., Ahmad, A., & Bashir, U. (2018). Impact of macroeconomic factors on stock returns of KSE 100 Index. Journal of Business and Tourism, 04(01), 133–145.
Kibria, U., Mehmood, Y., Kamaran, M., Arshad, M. U., Perveen, R., & Sajid, M. S. (2014). The Impact of Macroeconomic Variables on Stock Market Returns: A Case of Pakistan. Research Journal of Management Sciences, 3(8), 1–7.
Maheshwari, A., Upamannyu, N., Bhakuni, P., & Saban, A. (2013). Impact of wpi, exchange rate, gold rate, forex and market capitalization on NSE returns. International Monthly Refereed Journal of Research in Management & Technology, (Special Issue), 20–29.
Masuduzzaman, M. (2013). Impact of Macroeconomic Variables on the Stock Market Returns in Bangladesh: Does a Meaningful Impact Exist? Ministry of Finance Finance Division, 1–17.
Mezui, C. A. M., & Duru, U. (2013). Holding Excess Foreign Reserves Versus Infrastructure Finance : What Should Africa Do ?
Miller, J. I., & Ratti, R. A. (2009). Crude oil and stock markets: Stability, instability, and bubbles. Energy Economics, 31(4), 559–568. https://doi.org/https://doi.org/10.1016/j.eneco.2009.01.009
Ndlovu, B., Faisal, F., Resatoglu, N. G. R., & Türsoy, T. T. (2018). The Impact of Macroeconomic Variables on Stock Returns: A Case of the Johannesburg Stock Exchange. Romanian Statistical Review, 87–104. https://doi.org/10.18032/kaaba.2017.30.1.33
Phillips, P. C. B., & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75(2), 335–346. https://doi.org/10.2307/2336182
Ray, S. (2012). Foreign Exchange Reserve and its Impact on Stock Market Capitalization : Evidence from India. 2(2), 46–61.
Shafi, K., Hua, L., Idrees, Z., & Nazeer, A. (2015). Oil prices & stock market : Evidence from KSE & BSE. American Journal of Business, Economics and Management, 3(2), 40–44.
Zaidi, I., Ahmed, R. M. A., & Siok, K. S. (2017). Examining the relationship between economic growth, energy consumption and Co2 emission using inverse function regression. Applied Ecology and Environmental Research, 15(1), 473–484. https://doi.org/10.15666/aeer/1501_473484
Published
2020-06-22
How to Cite
Golder, U., Islam, M. N., & Kayser, M. S. (2020). Impact of Foreign Exchange Reserve, Exchange Rate and Crude Oil Price on Dhaka Stock Exchange Index: An Empirical Evidence from Vector Error Correction Model. Indian Journal of Finance and Banking, 4(1), 134-143. https://doi.org/10.46281/ijfb.v4i1.633
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2020 Uttam Golder, Md. Nazrul Islam, Md. Shahidullah Kayser
This work is licensed under a Creative Commons Attribution 4.0 International License.
