T-Y Granger Causality Between Stock Prices and Macroeconomic Variables: Evidence From Dhaka Stock Exchange (DSE)

Abstract

This study investigates the direction of the causal relationship between stock prices and macroeconomicaggregates in Dhaka Stock Exchange (DSE). By applying the techniques of unit root tests, cointegrationand the long run Granger causality test proposed by Toda and Yamamoto (1995), we test the causalrelationships between the DSE Stock Index and the thirteen macroeconomic variables, viz., consumer priceindex, deposit interest rate, foreign exchange rate, export payment, gross domestic product, investment,industrial production index, lending interest rate, broad money supply, national income deflator, foreignremittances and total domestic credit using monthly data for the period 1987 to 2010. The major findingsare that DSI is any way do not granger cause CPI, deposit interest rate, export receipt, GDP, investment,industrial production index, lending interest rate and national income deflator. But unidirectional causalityis found from DSI to broad money supply and total domestic credit. In addition bi-directional causality isalso identified from DSI to exchange rate, import payment and foreign remittances.

Keywords: Macroeconomic Variables, Cointegration, T-Y Granger causality