Stock Prices and Microeconomic Variables: T-Y Granger Causal Evidence From Dhaka Stock Exchange (DSE)

Abstract

This study examines the long-run equilibrium relationship and the direction of causality between stock prices at Dhaka Stock Exchange (DSE) and a set of four stock market oriented factors technically can be defined as microeconomic variables. Through utilizing the methods of Unit Root tests, Johansen and Juselius (1990) Cointegration test and the long run Granger Causality test proposed by Toda and Yamamoto (1995), we have investigated the long-run equilibrium relationship as well as causal relationships between the DSE all share price index (DSI) and the four microeconomic variables (i.e. market dividend yield, market price-earnings multiples, monthly average market capitalization and monthly average trading volume) using monthly data from the period January 2000 to December 2010. Significant findings include long-run equilibrium relationship among the variables under study. However, DSI, in any way, do not granger cause dividend yield; but DSI has bi-directional causal relation with market price-earning multiples and the first lag of the monthly average trading volume. On the other hand, unidirectional causality is found from DSI to the first lag of monthly average market capitalization but no causality is found from the opposite direction.

Keywords: Microeconomic Variables, Unit Root Test, Cointegration, T-Y Granger Causality