The impact of macroeconomic variables on stock prices for the selected countries

The effects of macroeconomic variables on stock prices have widely been investigated in a number of countries. The literature reveals contradicting results about the effectiveness of the macroeconomic variables and the degree of effectiveness and causality between the examined variables. The results show differences from one country to another and for different time periods considered. Back and forward linkages of the macroeconomic variables for the sustainable growth of the economies is a wide area of academia especially for the emerging and fragile countries. Economic stability and sustainable growth of the selected fragile countries is an ongoing debate in international economics and finance. The economies of fragile countries seem to be suffering more dramatically from the international economic crises. This explains the effects of macro-economic variables, which are very dependent on the factors defined by the international movement of capital, commodity, goods and services and as well as their interactions, on growth and stability of the fragile countries. In general, the researchers try to investigate the relationships between the macroeconomic variables and economic growth or stock prices. The macroeconomic variables used usually in a number of studies are current account balance, money supply, oil prices, interest rates, inflation rate, gold prices, exchange rate, export/import rate, industrial production index and capacity utilization ratio. The effort to construct a solid model and forecast the future values of economic magnitudes as correctly as possible has always been a primary activity for economists all over the world. In this study, it is aimed to compare the results of the analyses between developing and developed countries. Turkey and Brazil are selected as the growing economies which are considered as "fragile" economies and Germany as a developed country for a comparison purpose. The study investigates the impacts of the selected macroeconomic variables on stock prices for these economies. The quarterly data are used between the years of 2000 and 2022. The gross domestic product (GDP), interest rate, gold prices, exchange rate and inflation are selected as the main macroeconomic variables that have potential impacts on the stock prices based on the existing literature and economic theories using vector autoregressive (VAR) and vector error correction (VECM) models. VAR models are widely used in macroeconomics and finance in order to analyze the dynamic relationships among economic variables and to make predictions about their future behavior. The results show discrepancy between Germany and fragile economies while the effects of the macroeconomic variables have different effects on the stock prices in each country. The results demonstrate that the same macroeconomic variables may have different effects in explaining the stock prices based on the characteristics specific to each country. GDP, inflation rate, exchange rate, and gold price seem to be main variables in explaining the variation in stock prices in literature. The study examines the relationships between the macroeconomic variables and stock prices for both the developed and developing countries. Türkiye and Brazil are selected not only as the developing countries but also the fragile economies that have similar economic and social structures besides similar problems to deal with in short and long time horizons. The long-run cointegrating relationships between the variables will be investigated using quarterly data between 2000 and 2022 for the fragile countries as well as for Germany considered as a developed country. The study reveals a long-run (cointegrating) relationship between various macroeconomic variables and stock prices for all three countries. In terms of the effects of the macroeconomic variables on stock prices, each country has different results due to country-specific characteristics. Inflation rate, exchange rate, and gold price have different effects in estimating stock prices. Türkiye and Brazil have similar estimation results even though the elasticities of the stock price with respect to each macroeconomic variable vary in the short-run and the long-run. However, inflation and exchange rates play important role in stock price movements in all the countries while their effects and elasticities may vary in both the direction and magnitude in order to estimate VAR models. The Vector Autoregressive models can be estimated since the existence of the cointegration is proved by Johansen cointegration test. After determining the proper lag length, Vector Error Correction (VECM) mechanism is analyzed and short-run and long-run coefficients along with the speed of adjustments are estimated and interpreted for Germany, Brazil, and Türkiye. Keywords: Macro Economic Variables, Stock Prices, Fragile Economies, VAR, VECM, Johansen Co-Integration Test, Granger Causality.