JDE MANUEL

SELECTED MACROECONOMIC VARIABLES ON STOCK PRICES: AN EMPIRICAL ANALYSIS OF THE

PHILIPPINE STOCK EXCHANGE INDEX

ByJOANNA MARIE PINA S. DE MANUEL, MBA

*Research was presented last August, 2013 at Research and Educational Development and Training Institute (REDTI) International Research Conference*

JDE MANUEL

BACKGROUND OF THE STUDY

HOUSEHOLD FIRMS

INVESTMENT FUNDS

INCOME

STOCK - A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

A holder of stock (a shareholder) has a claim to a part of the corporation's assets and earnings. In other words, a shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10% of the company's assets.

JDE MANUEL

BACKGROUND OF THE STUDYINVESTORS

Php. 3

Php. 33.33

Php. 100,000 investment or 30,000 shares becomes 999,900 thereafter.

JDE MANUEL

BACKGROUND OF THE STUDYINVESTORS

Php. 3

Php. 33.33

Stock returns are affected by macroeconomic variables

JDE MANUEL

THEORETICAL FRAMEWORK

ARBITRAGE PRICING THEORY (APT)

An asset pricing model based on the idea that an asset's returns can be predicted using the relationship between that same asset and many common risk factors. Created in 1976 by Stephen Ross, this theory predicts a relationship between the returns of a portfolio and the returns of a single asset through a linear combination of many independent macro-economic variables.

JDE MANUEL

RESEARCH PARADIGM

Selected Macroeconomic

Variables- Interest rates- Inflation rates- Exchange rates

Philippine Stock Exchange Index (2006-

2013)

INDEPENDENT DEPENDENT

To determine if there is a long and short-run relationship between the selected macroeconomic variables and PSEi.

OBJECTIVES

Selected macroeconomic variables• Interest Rate (91-day T-

bills)• Exchange Rate• Inflation Rate• Philippine Stock

Exchange Index 2006-2013

VARIABLES

JDE MANUEL

ANALYSIS AND PRESENTATION OF DATA

Augmented Dickey-Fuller (ADF) Test Statistics Results

UN

IT R

OO

T TE

STIN

GAugmented Dickey-Fuller Test (ADF)

LON

G-RU

N R

ELAT

ION

SHIPCo-

integration Tests

SHO

RT-R

UN

REL

ATIO

NSH

IPEngle-Granger Test

JDE MANUEL

AUGMENTED DICKEY-FULLER (ADF)Variables

DifferenceMulti-collinearity

StatisticsP - value DecisionLevel Intercept

ER

1st Level -2.92 4.467 .099 Significant at .10

2nd Level .163 3.898 .321 Not Significant

3rd Level .075 3.017 .602 Not Significant

4th Level .019 1.742 .864 Not Significant

Durbin Watson Statistic (ER)

2.001

IR 1st Level .247 1.075 .019 Significant at .05 and .10

2nd Level -.096 1.131 -.151 Not Significant

Durbin Watson Statistic (IR)

1.997

CPI 1st Level .261 1.036 .013 Significant at .05 and .10

Durbin Watson Statistic (CPI)

2.108

JDE MANUEL

LONG-RUN TESTS

Model Coefficient Std. Error t P-value(Constant) .002 .036

Lag e .185 .060 3.084 .003

Co-integration Results

The p-value is .003 which is lesser than .05 and .10 level of significance hence, falling within the rejection region therefore rejecting the null hypothesis of no co-integration between the variables. The result of the data demonstrates that there is a long-run relationship between Psei and the selected macroeconomic variables.

JDE MANUEL

LONG-RUN TESTS

R R Square Adjusted R Square

Std. Error of the Estimate

.908 .824 .818 .6028

Model Coefficient Std. Error t P-value(Constant) 1.434 1.316

Inflation Rate .297 .087 3.430 .001

Exchange Rate .124 .138 .896 .373

Interest Rate -.558 .058 -9.588 .000

PSEi = 1.434 + .124ER - .558IR + .297CPI + E

Quantitative Model

JDE MANUEL

LONG-RUN TESTS

Quantitative Model PSEi = 1.434 + .124ER - .558IR + .297CPI + E

1% Increase in Exchange

Rate

.124% Increase in

PSEi

Dimitrova (2005) have observed that exchange rate and stock returns have positive weak correlation.

JDE MANUEL

LONG-RUN TESTS

Quantitative Model PSEi = 1.434 + .124ER - .558IR + .297CPI + E

1% Increase in Interest

Rate

.558% Decrease in

PSEi

Smith (1990), as cited on the report made by Osamwonyi and Osagie (2012), United States’ economy showed a negative correlation between stocks and interest rate.

JDE MANUEL

LONG-RUN TESTS

Quantitative Model PSEi = 1.434 + .124ER - .558IR + .297CPI + E

1% Increase in Inflation

Rate

.297% Increase in

PSEi

Hussain and Aamir (2012) supports the findings of this study and have indicated that companies will most likely pass the burden of the new price to consumers and therefore enhance their potential earnings.

JDE MANUEL

LONG-RUN TESTS

Psei = 1.434 + .124ER - .558IR + .297CPI + EQuantitative Model

Model Sum of Square Df Mean Square F Sig

Regression 156.616 3 52.205 143.678 .000Residual 33.428 92 .363

Total 190.044 95

**F(3,92) = 143.678 presents that the variables statistically significantly predicted Psei.

With a P-value of .000, which is less than .05, the table indicates that the regression model is statistically significant to predict the outcomes of the dependent variable, Psei.

JDE MANUEL

SHORT-RUN TESTS

Variables Hypothesis P-value Results

ERER to Psei .008*

Uni-directionalPsei to ER .350IR IR to Psei .009*

Bi-directionalPsei to IR .079*CPI CPI to Psei .487

independentPsei to CPI .190

ENGLE GRANGER TEST

The table shows a uni-directional relationship between ER to Psei which implies that ER predicts Psei but not vice versa. IR on the other hand is the only variable that can predict Psei and vice versa and finally CPI reflects no causal relationship to stock prices and vice versa.

JDE MANUEL

CONCLUSION AND RECOMMENDATION

The study revealed a long-run association between the selected macroeconomic variables and stock prices. ER and CPI showed a positive and significant relationship while IR presented a negative significant relationship with stock prices. The Granger Causality Test revealed that ER have a uni-directional relation, CPI have independent relation and IR have bi-directional relationship.

From the results, it is therefore suggested that money supply and oil price index be included for further studies. More advanced time series models may be used to generate more accurate results. Future researchers may seek to explore the effects of the macroeconomic variables to individual stocks listed under PSEi. To the government, it is suggested to create policies that will monitor the Philippine capital markets. And finally, to the investors, the information taken from this study may serve as basis for investing decision-making.

JDE MANUEL

CONCLUSION AND RECOMMENDATION

JDE MANUEL

CONCLUSION AND RECOMMENDATION

THANK YOU FOR LISTENING