Lagged macroeconomic variables sensitivity of firm stock returns on an emerging stock market

Abstract

This study analyses lagged effect of macroeconomic variables on firm stock returns by employing data for the period from 1998 to 2012. The macroeconomic variables investigated in this study include: exchange rate, risk free rate, inflation, money supply and oil prices. For this purpose, generalized autoregressive conditional heteroskedasticity (GARCH) model is applied. The findings declared that lagged effect of economic factors plays considerable role in explaining the firm stock returns. Such that three and four are the most common lags indicating significant and positive impact of exchange rate on firm stock returns. While, two and five lags are the most common lags implying statistically significant but negative relation of exchange rate with firm stock returns. However, it is uncovered that overall the statistically significant lagged effect of risk free rate on stock returns is negative in large and is found to be maximized at lag one. More so, lagged effect of inflation rests on quite worthy outcomes; firstly it is noted that its significant effect is shifted from negative to positive with the increase in lags from lag one to lag four. Secondly, it is established that four lags is the most common lag reflecting statistically significant positive impact of inflation on firm stock returns, while one and two lags are the most common lags displaying negative and significant relationship of inflation with firm stock returns. Taken together, money supply indicates significant positive lagged effect on firm stock returns in majority of the cases, that is subject to maximization either at lag two or lag five. However, largely, documenting significant positive lagged effect of oil prices on firm stock returns, it is established that one and two lags are the most common lags at which oil prices has significant and positive impact on firm stock returns. Finally, this research study sets the intimations to both the policy makers and investors together with some fresh areas for the future research.