Economic Factors Affecting on the Value Stock Exchange of Thailand Index - Literature review Example

Literature Review Literature review: Economic Factors affecting on the value Stock Exchange of Thailand index (SET Index) Introduction Relationship between stock market value and multiple macroeconomic variables have been very limited throughout the times. The literature review studies seven macroeconomic variables that affect stock value of Stock Exchange of Thailand through application of Arbitrage Pricing Theory (APT) with effect to change with the asset prices, monetary policy change and equity markets and its impacts on the stock values. Arbitrage Pricing Theory Arbitrage Pricing Theory is an alternative to Capital Asset Pricing Theory; the model has been used throughout time to determine returns of capital assets in the variable structures. Ross states that the theory predicts the returns on assets and the other risk factors. The theory allows determining the relationship between return of a portfolio and return of an asset. The theory has been applied to determine macroeconomic factors to determine stock through examining seven macroeconomic variables that are risk premium, industrial production, inflation, market return, consumption, and oil prices. The results depict a positive relation between macroeconomic variables and stock return. The fundamental concept in arbitrage pricing theory is the ‘law of one price’ that is, that the two assets cannot be sold at different prices. The theory determines simpler version than the Capital Asset pricing model in which one operating system affects the returns. Arbitrage pricing theory determines investor’s preference towards risks. Azzez & Yonezawa (2006) study investigates the empirical evidence for the pricing of macroeconomic factors in the Japanese Stock market using APT model. The model determines pre- and post- bubble period of the stock market and determine the relationship between the macroeconomic factors and stock returns (Azeez & Yonezawa, 2006). Fisher’s theory Relationship between macroeconomic factors and Stock returns The study of Zhu (2012) illustrates the impacts of macroeconomic factor (returns of the energy sector in Shanghai. The main objective of the study id to determine the influence of macroeconomic factors on the stock market, it focuses on the exchange rate, industrial production, bonds, exports, imports foreign reserve and the unemployment rate (Zhu, 2012). Quantitative methodology was adopted to conduct a study, and the data was gathered from secondary sources such as, National Bureau of Statistic of China, People’s Bank of China for a consecutive period of 2005-2011. Arbitrage Pricing Theory has been applied to determine the returns of assets and risks. The finding of the study reveals that the exchange rate, export, foreign reserves and the unemployment rate has a direct relation on the stock returns of the energy sector in Shanghai stock market. In a similar fashion, Sutheebanjard and Premchaiswadi (2010) examine dynamic system of Thailand stock market index prediction to determine stock market performance and influence of many factors (inflation rate, economic environment, political issues, interest rates, etc.). The main objective of the study is to determine prediction function and importantly economic factors of Dow Jones, Nikkei and Hang Send indexes with respect to the minimum loan return and the previous SET index (Sutheebanjard & Premchaiswadi, 2010). Quantitative methodology was adopted through periodical examination of the three different period of the SET index. Evolution strategies were used to determine the evolutionary computation, and the data was gathered from the Bank of Thailand and historical data of SET Index, Dow Jones Index, Nikkei Index and hang Send Index and minimum load return. The information was also gathered from the different countries from  different stock markets. The findings of the study depict no major different in the performance of the stock although in the times of crisis took place in Thailand. Nguyen (2010) in his study examines stock price behavior with respect to the new emerging market of Stock and Exchange in Thailand (SET) through application of Arbitrage Pricing Theory (Nguyen, 2010). The main focus of the study is to determine the market risks and returns that are determined by the fundamentals on the multifactor model return to analyze the critical economic factors that drive the competition in the market. The theory has been applied to the data collected before the Asian Financial Crisis 1997-1998 to determine the relationship between stock returns and Stock Exchange of Thailand. In addition, prominent factors, economic fundamentals, exchange rate, industrial production, etc. have been studied. The finding of the study shows that the change in the exchange rates have a positive relation with the stock return, therefore, exchange rate and industrial growth both have a systematic effect on the stock return. International equity movement has become one of the significant elements to determine policy issues in Asia. The Thailand Style of sudden withdrawal of the portfolios during Asian Financial Crisis has gained attention of international market. The study of French and Naka (2013) examines the linkage between US equity movement in the stock markets of China and India with respect to equity returns and fundamental variables. Variable data was collected from the S&P 500, Shanghai Composite index of A and B shares (French & Naka, 2013). The general equity returns that are the capital flow were analyzed to determine equity return, and monthly data of the equity flow of the US treasury was analyzed to evaluate the linkage between two variables. The findings of the study demonstrate that the US institutional investors are not the destabilizing influence on the markets of China and Indian and the innovation in dividends have a negative impact on returns (French & Naka, 2013). It is evident from the study that the potential growth of these markets has a positive impact on the stock market, whereas US equity flow has no significant influence on the equity returns India and China (French & Naka, 2013). Gan et al. (2006) in their study investigates the relationship between New Zealand market index and the seven macroeconomic variables during the period of January 1990-2003 (Gan et al., 2006). The data analyzed using co-integration and Granger Causality test. The test reveals a long term relation of the index with the macroeconomic variables. In addition, the results of causality test demonstrate that the New Zealand stock was not the dominant factor that changed macroeconomic variables (Gan et al., 2006). The findings of the study show that the interest rate, money supply and real GDP influenced the New Zealand Stock. Similarly, Robert (2008) in his study investigates the effects of two macroeconomic variables ( oil prices and exchange rate) on the stock market return in the emerging economies (Brazil, Russia, India and China) through using the data of 1999 to 2006 June (Gan et al., 2006). The findings of the study show that there is no evident relationship between present and past market returns and macroeconomic variables (Gan et al., 2006). In addition, no particular relationship between exchange rate and oil prices has been determined that has influence on the stock market index of the respective countries (Gan et al., 2006). Aburgi (2008) determines a linkage between macroeconomic variables and the stock return through analyzing the stock indexes of Argentina, Brazil, Chile and Mexico using historical dataset of January 1986 to August 2001 (Abugri, 2008). The study shows that the US Treasury bills and MSCI world index were significant elements in the four markets. Among all the macroeconomic variables interest rates and exchange rate were significant to explain stock return (Abugri, 2008). It results of the study show that the variables and the stock return varies from country to country, as the study reflects that the for Brazil the exchange rate and interest rate had a negative impact on the stock return, whereas IIP had a positive impact on the stock return (Abugri, 2008). In Mexico, money supply and interest had a negative impact on stock return similar like Argentina stock market. On the contrary, in Chile IIP had a positive relation on the stock return, and the stock and exchange rate has insignificant impacts on the stock return. Rehman (2009) investigate the macroeconomic determinates of the stock market return in Malaysia stock market through using cointegration techniques and vector error correction mechanism (Rahman et al., 2009). Monthly data was gathered from the period January 1986 to March 2008 (Rahman et al., 2009). The findings of the study show that the interest rate, reserves and industrial production index have a positive relation, whereas money supply and exchange rate had an inverse relation on the Malaysian stock market returns. Asolu & Ognumuyiwa (2011) in the study investigate the impacts of macroeconomic variables on the average share price of Nigeria between 1986-2007 (Asaolu & Ogunmuyiwa, 2011). The causality test indicates that the average share prices are not influenced by the macroeconomic variables in the period (Asaolu & Ogunmuyiwa, 2011). Akbar et al. (2012) determine macroeconomic variables and Karachi Stock return using VECM and co-integration (Akbar et al., 2012). The study shows stock market index and set macroeconomic variables have a positive relation with the money supply and short-term interest rates and negative relation with the inflation and foreign exchange rate (Akbar et al., 2012). Ray and Vani (2003) in their study determine the link between stock market movement and real economic factors in the Indian Stock market using a VAR model and artificial neutral network in the period of 1994 to 2003. The findings of the study show that the interest rate, industrial production, money supply, the inflation rate and exchange rate have significant impacts on the equity prices whereas there is no significant linkage on the fiscal deficit or foreign investment that stimulates stock market movement. In addition, Ahmed (2008) conducted a study to investigate the relationship between stock prices and macroeconomics variables making use of quarterly data for the period of 1995-2007 using Johansen’s approach and co-integration and Toda Yamamoto Granger causality test. The results of the study show that the FDI, money supply and index of industrial production have long run relationship with the stock prices. The study of Pal & Mittal (2011) determine the relationship between the Indian stock markets and macroeconomic variables using quarterly data of 1995 to 2008 through Johansen’s co-integration. It shows that the stock market index and macroeconomics have a long term relationship. In addition, the results of the study reveal that the inflation and exchange rate greatly influence BSE Sensex, interest rate and gross domestic saving. Fazil, Shaln & Radsar (2014) investigate the effects of macroeconomic factors in the performance of the Tehran Stock Exchange (TSE). The study focuses on the factors of the money supply, the inflation rate, oil prices, fluctuation in the interest rate and the change in the industrial production and its impacts on the stock prices (Fazil et al., 2014). The finding of the study show interest rates, money supply, the inflation rate and change in industrial production have significant impacts on the stock rates if the level of significance is five percent. The arbitrage pricing theory model demonstrates that the inflation has insignificant impacts on the stock. The study of Husam, Turgut & Nil (2009) investigate the performance of Istanbul Stock Exchange using Arbitrage Pricing theory using monthly data ranging 2001-2005 (Husam et al., 2009). It determines six macroeconomic variables that are, interest rate, inflation, the risk premium, exchange rate and money supply. The test confirms that ten out of thirteen did not have any significant co-relation (Husam et al., 2009). Interest rate has a positive effect in on the stock returns (Husam et al., 2009). In addition, inflation and the risk premium has a positive effect on the returns, whereas money supply had a positive impact on the seven portfolios and negative impacts on the other portfolio (Husam et al., 2009). It indicates that the money supply has different effects on return of the market (Husam et al., 2009). Furthermore, Benakovic & Posedel (2010) analyzes the returns of the fourteen Croatian capital market during the period of 2004-2009 using inflation, interest rates, market index, oil prices and industrial production as Macroeconomic variables (Benaković & Posedel, 2010). The main objective of the study was to determine the relation between change in the factors and the returns (Benaković & Posedel, 2010). The findings of the result show that the market index has a positive relation with the stock returns (Benaković & Posedel, 2010). Moreover, interest rate, oil prices and industrial production also had a positive relation with the returns. The findings of the study show that the inflation and risk premium were the dominate factors that had negative impacts on stock return (Benaković & Posedel, 2010). The study of Kurwornu (2012) investigate the effects of macroeconomic variables and its effects on the Ghanaian stock market return using monthly data of January 1992 to December 2008 (Kuwornu, 2012). The macroeconomic variable that were used in the study were the consumer price index (inflation, oil prices, interest rates, exchange rate 91 days treasury bills) in order to conduct the study quantitative methodology was adopted using Johansen Co-integration procedures and cointegration to determine the relationship between macroeconomic variables and stock returns. The results of the test show that the Treasury bill had a significant impact on the stock market in a short run. Inflation rate also had a positive impact on the stock return. The error correction model of the study reveals that the inflation rate, exchange rate and oil prices had a negative impact on the on the stock returns. However, Treasury bill did not have a significant impact on the stock returns on long and short run. Gazi & Hisham (2010) in the study investigates the relationship between macroeconomic variables and stock market return of Jordan stock market. The study was conducted using cointegration analysis to determine trade surplus, foreign exchange reserves, money supply and oil prices as major macroeconomic variables to determine its long-term impacts on Jordan stock return (Kuwornu, 2012). The findings of the study exhibit negative relation between crude oil prices and stock market returns (Kuwornu, 2012). It is also evident from the study that the increase of the oil prices can greatly influence economic activities of the country. In addition, interest rates do not have a significant impact on the stock returns; however, the other macroeconomic variables depicted significant effects on stock returns. The study suggests that the impacts of the variables vary with the different portfolios. In a similar manner, Anokye & Tweneboah (2009) determine the role of macroeconomic variables on the returns of Ghana Stock Market (Anokye & Tweneboah, 2009). Quantitative methodology was adopted to conduct a study using Databank stock index in order to determine Ghana Stock market, and macroeconomic variables that were examined for the study were foreign direct investment, Treasury bill rate, consumer price index to determine inflation and exchange rate (Anokye & Tweneboah, 2009). The study investigates the relation in the long run and short run using quarterly data from 1991-2006 using Johansen’s multivariate cointegration test and innovation accounting techniques (Anokye & Tweneboah, 2009). The findings of the study demonstrate long run relationship between macroeconomic variables and stock prices and the results of impulse response function and Forecast Error Variance decomposition reflected that the interest rate and foreign direct investment are key determinants that influence share price movement in Ghana (Anokye & Tweneboah, 2009). Haroon & Jabeen (2013) determine the relationship and impacts of macroeconomic variables on the three-month, six-month and twelve-month Treasury Bill rates, inflation rates (consumer price index, wholesale price index) and sensitive price index to determine its impacts on the Karachi Stock Exchange (Haroon & Jabeen, 2013). In order to conduct the study the monthly data was gathered during the period of 2001-2010. The study determines inflation indices and interest rate on the share movement (Haroon & Jabeen, 2013). The findings of the study demonstrate a positive relation between treasury bills and stock returns (Haroon & Jabeen, 2013). Mashayekh et al. (2011) determine the relationship between macroeconomic variables that are the inflation rate, interest rate and growth rate of one year investing deposit and gold stock prices in Tehran Stock Exchange (TSE) using monthly data during the period of 1998-2008. VAR model and Johansen cointegration test. The findings of the study show that there is a long positive relation between the inflation rate and stock return and volume of transaction. It also showed that the bank interest rate greatly influence the stock market activities, increase in the interest rates decline in the stock activities (Mashayekh et al., 2011). The study argued that the increase in the bond interest rate does not have a negative effect on TSE stock especially in case of bond, it is because bonds are not competitive investment opportunity (Mashayekh et al., 2011). The VECM results determine the relationship between the gold market and stock market. It showed that the gold market and stock market had a strong relation in a short run and identified that it can be used as a substitute for stock markets (Mashayekh et al., 2011). It is evident from the study that the gold returns play a significant role in defining stock market trend in the long run (Mashayekh et al., 2011). Harasheh & Libdeh (2011) in their study determine the co relational and causality relationship of stock prices and Palestine with respect to the variables that are Gross Domestic Products, the inflation rate, exchange rate, LIBOR and balance of trade through the monthly data extracted from the first quarter of 2000- 2010. The study was conducted on the base of ten-year quarterly data that was unit root test through Granger causality test. The regression test shows a significant relation between macroeconomic variables its impacts on Palestine Exchange. Furthermore, Sharma & Mahendru (2010) studied long-term relationship of Bombay Stock Exchange and macroeconomic variables that are, gold prices, the inflation rate, interest rate, foreign exchange rate and fluctuation in the exchange rate. Weekly data was gathered from January 2008-2009 through applying multiple regression equation models to determine the relationship between stock prices and macroeconomic variables. The findings of the study show that exchange rate and gold prices have a significant relation on stock prices and foreign exchange and inflation rate have insignificant relation on stock returns. Oskooe (2010) in the study determine relationship between the stock market of Iran and economic growth. Quarterly data was gathered from Iran Stock Market index and Real Gross Domestic Product from the period 1997-2008 through analytical techniques Akaike Information, VAR, VECM and Granger Causality test. The result of the study demonstrates that GDP has a positive impact on stock prices through necessary tool to predict future stock prices and the Granger Causality test confirms the linkage economic growth and stock price short run. Daferighe & Aje (2009) in their study determine the impacts of macroeconomic variables that are Real Gross Domestic Product, Interest Rate and Inflation rate on stock prices of companies listed on the Nigerian stock exchange. The data was gathered from the National Statically Bureau for the period of 1997-2006. Regression analysis was used to build a model and represent stock prices of the Stock Market Value Index. The findings of the study depict that 95 percent of the variation in the stock prices were because of the reduction in the interest and inflation that caused the stock prices to increase it RDGP. It shows that interest rate and inflation rate have a significant impact on the stock prices of Nigeria during the period. The study of Esmaeili & Gholami (2013) examines the relationship between growth rate of stock index and macroeconomic variables that are the inflation rate, money supply, growth rate, exchange rate and oil prices to determine their relationship in the long run (Esmaeili & Gholami, 2013). The study was conducted using vector autoregression and generalized dickey fuller unit to determine liquidity growth rate and level in the long run relationship between economic variables and rate of cash returns (Esmaeili & Gholami, 2013). The findings of the study show positive relation between oil prices and inflation whereas the growth of the cash flow had a negative relation with the stock returns (Esmaeili & Gholami, 2013). Patel (2012) determines the effects of macroeconomic determine and its impacts on stock market return of India through analyzing data between January 1991 and 2011 (Patel, 2012). The study focuses to determine the relationship between determinates in relation to eight macroeconomic variables that are, interest rate, inflation, exchange rate, industrial production, money supply, gold prices, silver prices and oil prices under the two stock exchange that are, Sensex and S&P CNX 50. The study was conducted through applying augmented Dickey Fuller Unit Root test and Vector Error Correction Model. The findings of the study demonstrated that the interest rate in the Sensex, Nifty, exchange rate index of industrial production, gold price, silver price and oil prices. The study indicates that inflation and interest have empirical impacts on the market return. in addition, it is evident that the macroeconomic variables have long run relationship between macroeconomic variables and stock market indices. The causality test result shows that the exchange rate and stock market indices are affected through Oil prices. Azizan and Sulong (2011) analyzed that the Malaysian stock market is associated with the Asian countries economic variables due to which the stock prices of the exchange rate of the Asian countries have a greater impact of Malaysian stock market. Ali et al. (2010) in the study make use of cointegration to determine interest on the interest price and industrial production. The study shows that there is no significant relation between macroeconomic indicator and stock prices in Pakistan stock market. Cagli et al. (2010) in their study find that the stock market is cointegrated with gross domestic production, crude oil and industrial production. It shows a significant relation between the macroeconomic variables and market return. References List Benaković, D. & Posedel, P., 2010. Do macroeconomic factors matter for stock returns? Evidence from estimating a multifactor model on the Croatian Market. Zagreb: University of Zagreb. Zhu, B., 2012. 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