Macroeconomic Variables and Stock Market Indices
The relationship between macroeconomic variables and stock market indices
1.1 Introduction and Background
The financial system is considered to be the key to economic growth. A well developed and sound financial system promotes investment by the identification and financing of profitable business opportunities, through the mobilization of savings, the efficient allocation of resources, by helping to diversify risks and by facilitating the exchange of goods and services. (Mishkin, 2001). As such, stock markets have assumed a developmental role in international economics and finance following the impact they have exerted on economic activity. Stock markets are known not only as the foundations of a modern, market based economic system but they also act as channels for the movement of long term financial resources from the savers of capital to the borrowers of capital. Therefore, efficient capital markets have an instrumental role to play in economic growth and prosperity.
Fama, who is often quoted as the father of the efficient market hypothesis has described an efficient market as one in which security prices adjust rapidly to the arrival of new information and therefore, the current prices of securities reflect all information about the security. In simpler terms, this means that no investor should be able to employ readily available information to be able to predict movements in stock prices quickly enough in order to make profit through trading of shares. Thus, the efficient market hypothesis requires stock prices to contain all relevant information.
1.2 Professional Significance and Rationale
This study is important for several reasons. The EMH (Efficient Market Hypothesis), in particular the semi strong from efficiency is considered to be of paramount importance for economists, policy makers and investors alike. The semi strong form of EMH asserts that all publicly available information for example accounting data in a company’s annual report such as
1.1 Introduction and Background
The financial system is considered to be the key to economic growth. A well developed and sound financial system promotes investment by the identification and financing of profitable business opportunities, through the mobilization of savings, the efficient allocation of resources, by helping to diversify risks and by facilitating the exchange of goods and services. (Mishkin, 2001). As such, stock markets have assumed a developmental role in international economics and finance following the impact they have exerted on economic activity. Stock markets are known not only as the foundations of a modern, market based economic system but they also act as channels for the movement of long term financial resources from the savers of capital to the borrowers of capital. Therefore, efficient capital markets have an instrumental role to play in economic growth and prosperity.
Fama, who is often quoted as the father of the efficient market hypothesis has described an efficient market as one in which security prices adjust rapidly to the arrival of new information and therefore, the current prices of securities reflect all information about the security. In simpler terms, this means that no investor should be able to employ readily available information to be able to predict movements in stock prices quickly enough in order to make profit through trading of shares. Thus, the efficient market hypothesis requires stock prices to contain all relevant information.
1.2 Professional Significance and Rationale
This study is important for several reasons. The EMH (Efficient Market Hypothesis), in particular the semi strong from efficiency is considered to be of paramount importance for economists, policy makers and investors alike. The semi strong form of EMH asserts that all publicly available information for example accounting data in a company’s annual report such as