Macroeconomic Variables and Stock Market Prices in Frontier Markets: A Panel Data Analysis

This study attempts to investigate the relationship between three macroeconomics indicators and the stock market prices of three South Asian frontier markets, namely; Sri Lanka, Bangladesh and Vietnam. Specifically, the paper studies exchange rate, consumer price index and industrial production index using monthly data over the period of February 2013 to June 2018. It employs a battery of tests, which includes panel unit root, panel co-integration, dynamic ordinary least square and granger causality to examine the long run association, long run elasticities and short run causality between the said variables. Pedroni panel cointegration test confirms the existence of long run equilibrium. The argument is further supported with the results of panel DOLS long run elasticities. The consumer price index and industrial production index have a statistically significant influence on the market prices in the long run. However, the test fails to confirm a long run association between the exchange rate and stock market prices. In contrast, the causality test provides support towards a short run association between exchange rate and market prices, whereas no other short run causality is found to be running from the remaining macro variables to the stock prices. Frontier markets with very high growth potentials and mounting opportunities can be considered as a gold mine to the right set of investors. Hence, these findings will be useful for economic policymakers, academics and to the investors and investment advisers in numerous ways.