1.

Introduction
2. Literature review
3. Objectives
There are huge scopes to work in the area of this research. Considering the dead line, exposure of
the paper has been wide-ranging. The study Relationship between Macroeconomic Variables
and Stock Market Index in context of Bangladesh has covered six macroeconomic variables like
Inflation, GDP per capita, Consumer price index (CPI), Money supply, Interest rates (Interbank)
and Exchange rates to find if there is any relationship available between stock market index with
these variables.

3.1 Primary objective

To know whether any relationship is available between stock market index and variables like
Inflation, GDP per capita, Consumer price index (CPI), Money supply, Interest rates (Interbank)
and exchange rates.

3.2 Secondary objectives

Test different statistical tools to find the relationship between the

macroeconomic variables and the stock market index.

Co-relating the outcomes with the statistical tools and draw a conclusion.
Appropriate use of different statistical methods.
Proper interpretation of the outcomes.

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4. Significance of the study

The macroeconomics variables like CPI, GDP per capita, inflation, exchange rate, interbank
interest rate and money supply are highly interlinked with each other. Say for example if we
think about the CPI then its related with the inflation, money supply, GDP etc. The significance
of our research is changes in those variables will have impact on the investor, banks, foreign
investor, export and import oriented firms etc. If we start with the money supply others can be
put in line with this. The recent monetary policy of Bangladesh Bank has given a signal for
expansionary monetary policy. It indicates to increase the money supply in the market. The
international market like UK, USA, and India shows that when money supply increases in the
market, stock index changes very frequently as money becomes cheap in market. Bangladeshi
Market also shows the similar scenario. On the other hand, increase in money supply gives the
positive expectation for the growth of GDP. If GDP per capita increases then general individual
or small investor will be interested in the stock market which will help the index to go up. In this
case exchange rate plays a very important role. Because the exchange rate also affects the
interbank rate as well as the proceeds of export and import. When exchange rate fluctuates like
USD depreciate against BDT then importer will face the problem as they need to pay more
money to convert into USD. As a result, companys performance will be hampered and stock
price will give negative impression regarding the company. On the other hand a change in
exchange rate affects the interest rate of Treasury bill and bond. Say for example when dollar
depreciates then yield of bill or bond also decrease. As a result people get less profit from the
investment of government security. It influences the investor to invest in the stock market. So,
index of the stock market also changes according to that. If interest rate decreases then index will
go up positively and if the interest rate increases then the trade goes down. In the Bangladeshi
stock market perspective many things cannot be explained with the fundamental theory because
most of the small investors do not think about the fundamental variables. They invest based on
the trend. So the index moves with the trend. Another important factor is the inflation. Inflation
affects almost all the people specially the investor and firms, because if inflation increase then
cost of good production will increase. So people will have less money to invest in the stock
market. Its the common phenomena in the international as well as in the local market.

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5. Data Sources

5.1 Information needs

Our research topic demands to conduct an inferential statistics. To do this we focused on some
important macroeconomic variables to find the relationship with the stock market index. So we
collected information regarding variables from different sources like Bangladesh bank website,
Dhaka stock exchange and some other important economic websites. We also collected some
theoretical information from reports, journals, article, and other published sources.

5.2 Primary sources

To conduct this research we collected all the data from primary sources like Bangladesh bank
website, Dhaka stock exchange and some other important economic websites. For example
exchange rates are collected from Bangladesh bank website. CPI, inflation, GDP per capita,
Money supply etc are collected from an economic website (www.tradingeconomics.com) and
general index of stock market is collected from DSE library.

5.3 Secondary sources

Some of the information is also collected from secondary sources like published reports,
journals, articles, news paper articles and others to conduct this research. Secondary information
has been mainly used to prepare literature review.

5.4 Data collection procedure

Monthly data are collected for each variable (dependent and independent) from 2005 to 2013. So
sample size is 108 (n=108).
For Inflation rate, consumer price index (CPI), Money supply, and interbank interest rates data
was taken from trading economics website as it was directly given. But for exchange rates and
general stock index we have collected data for each day and then have taken the average to
ensure the accuracy. We have faced difficulty while collecting GDP per capita as it was given on

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yearly basis. So we have considered yearly value as a same value for each month of that
particular year.

6. Methodology
6.1 Data analysis procedure
The analytical part of this report is very important and it demonstrates the actual scenario
relating to the dependent and independent variables. So, after collecting all information related
to the variables, data were analyzed by using SPSS software. For the analytical part of this
report we tried to use almost all the statistical tools like t-test, z-test, chi-square analysis,
ANOVA, correlation, regression, etc covered in the class.

6.2 Main variables

In this study we worked with some of the macroeconomic variables such as consumer price
index (CPI), GDP per capita, inflation rate, exchange rates, interbank interest rates, money
supply and general stock index of DSE. We used the general share price index of the Dhaka
Stock Exchange as the dependent variable of the study.
6.2.1 Independent variables

In this study we have selected six variables as independent variables. They are

Inflation Rates
Consumer Price Index (CPI)
Exchange Rates
Money Supply
Interbank Interest Rates and
GDP per Capita

6.2.2 Dependent variables

We selected only one variable as dependent variable and this is Stock market Index (DSE)

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7. Hypothesis
Our hypothesis is Macroeconomics variable like Inflation, Interest rate (inter-bank), Money
supply, GDP per capita, Exchange rate and Consumer price index has a relationship with Stock
market index (DSE).

8. Findings and Analysis

8.1 Reliability Test
Reliability test or Cronbach's alpha is generally used to see the internal consistency of the data
collected for research. Generally reliability score 0.7 is required for study before using the data
to continue research.

Reliability Statistics
Cronbach's
N of Items
Alpha
.753
7
Table 1 Reliability Test

In this case reliability test give us alpha coefficient for 7 items to be 0.753 which is greater than
0.75. It indicates that the scale has high internal consistency or reliability. So we can continue
our study without improving alpha score.

8.2 Correlations
Correlation is one of the most commonly used statistics in any type of research. Using this
statistics we tried to find out the relationship between two variables or two sets of data.
Correlation gives us a single value regarding two variables and that helps us to identify the
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degree of relationship between two variables. Correlation defines how much total variation in
one variable is defined by another variable.

Table 2 Overall Correlation Table

Above correlation table clearly describes the relationship between all variables. Positive value
means variables are positively related but negative values indicate opposite relation. Rather than
only looking at Pearson correlation, we also look at the significance level to find the relationship.
If the significance level is less than 0.05 we consider that there is relationship between variables
and if the significance level is more than 0.05 we consider that there is no relationship.

8.2.1 General Stock Index and Consumer Price (CPI) Index Relationship:
Testing the correlation between General stock index and consumer price index (CPI) Index relationship is
explained below:

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Hypothesis:
H0: = 0 [General stock index and consumer price index (CPI) are not correlated]
H1: # 0 [General stock index and consumer price index (CPI) are correlated]

Decision rule:
We will reject null hypothesis if the value of p and accept null hypothesis if p value >
Correlation between General Stock Index and CPI
CPI
General Index
CPI
Pearson Correlation
1
.720*
Sig. (2-tailed)
.029
N
108
108
*
General Index
Pearson Correlation
.720
1
Sig. (2-tailed)
.029
N
108
108
*. Correlation is significant at the 0.05 level (2-tailed).
Table 3 Correlation between General Stock Index and CPI

From the table it is clear that the Pearson correlation between General stock index and consumer
price index (CPI) is 0.720. So we can say that there is a relationship available between these two
variables. Since the p-value (.029) is less than is (0.05), the correlation test is significant and
we can reject null hypothesis. Therefore, we can say that these two variables are correlated with
each other. It says that consumer price index (CPI) is an important factor for general stock index.
8.2.2 General Stock Index and Money Supply Relationship

Testing the correlation between General Stock index and money supply relationship is explained
below.

Hypothesis:
H0: = 0 [General stock index and money supply are not correlated]
H1: # 0 [General stock index and money supply are correlated]

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Decision rule:
We will reject null hypothesis if the value of p and accept null hypothesis if p value >

Correlation between General Stock Index and Money Supply

General Index
General Index

Money Supply

Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)

N
*. Correlation is significant at the 0.05 level (2-tailed).

1
108
.727*
.026
108

Money
Supply
.727*
.026
108
1
108

Table 4 Correlation between General Stock Index and Money Supply

From the above correlation table it is clear that the Pearson correlation between General stock
index and money supply is 0.727 and it indicates that there is a relationship available between
these two variables. Since the p-value (.026) is less than is (0.05), the correlation test is
significant and we can reject null hypothesis. Therefore, we can say that these two variables are
correlated with each other. It says that money supply is an important factor for general stock
index.
8.2.3 General Stock Index and GDP Per Capita Relationship

Testing of the correlation between General Stock index and GDP per capita relationship is
mentioned below-

Hypothesis:
H0: = 0 [General stock index and GDP per capita are not correlated]
H1: # 0 [General stock index and GDP per capita are correlated]

Decision rule:
We will reject null hypothesis if the value of p (0.05) and accept null hypothesis if p value >
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 (0.05)

Correlation between General stock index and GDP per capita

General Index
GDP per
Capita
General Index
Pearson Correlation
1
.722*
Sig. (2-tailed)
.028
N
108
108
GDP per Capita
Pearson Correlation
.722*
1
Sig. (2-tailed)
.028
N
108
108
*. Correlation is significant at the 0.05 level (2-tailed).
Table 5 Correlation between General stock index and GDP per capita

From the above correlation table it is clear that the Pearson correlation between General stock
index and GDP per capita is 0.722 and it indicates that there is a relationship available between
these two variables. Since the p-value (.028) is less than is (0.05), the correlation test is
significant and we can reject null hypothesis. Therefore, we can say that these two variables are
correlated with each other. It says that GDP per capita is an important factor for general stock
index.

8.2.4 General Stock Index and Exchange Rates Relationship

Testing of the correlation between General Stock index and exchange rates relationship is
mentioned below-

Hypothesis:
H0: = 0 [General stock index and exchange rates are not correlated]
H1: # 0 [General stock index and exchange rates are correlated]

Decision rule:

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We will reject null hypothesis if the value of p (0.05) and accept null hypothesis if p value > (0.05)
Correlation between General Stock Index and Exchange Rates
General Index
Exchange rate
General Index
Pearson Correlation
1
.417
Sig. (2-tailed)
.264
N
108
108
Exchange rate
Pearson Correlation
.417
1
Sig. (2-tailed)
.264
N
108
108
Table 6 Correlation between General Stock Index and Exchange Rates

From the table it is clear that the Pearson correlation between General stock index and exchange
rate is 0.417, so we can say that there is no relationship available between these two variables.
Since the p-value (.264) is greater than is (0.05), the correlation test is insignificant and we
cannot reject null hypothesis. Therefore, we can say that these two variables are not correlated
with each other. Meaning that exchange rate is not an important factor for general stock index.

8.2.5 General Stock Index and Interest Rates Relationship

Testing of the correlation between General Stock index and interest rates relationship is
mentioned below-

Hypothesis:
H0: = 0 [General stock index and interest rates are not correlated]
H1: # 0 [General stock index and interest rates are correlated]

Decision rule:
We will reject null hypothesis if the value of p (0.05) and accept null hypothesis if p value >
(0.05)
Correlation between General Stock Index and Interest Rate
General Index
Interest rate
General Index
Pearson Correlation
1
-.118
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Interest rate

Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N

108
-.118
.763
108

.763
108
1
108

Table 7 Correlation between General Stock Index and Interest Rate

From the above table it is clear that the Pearson correlation between General stock index and
interest rates is -0.118, so we can say that there is no relationship available between these two
variables meaning they are negatively related. Since the p-value (.763) is greater than is (0.05),
the correlation test is insignificant and we cannot reject null hypothesis. Therefore, we can say
that these two variables are not correlated with each other. Meaning that interest rate is not an
important factor for general stock index.
8.2.6 General Stock Index and Inflation Relationship

Testing of the correlation between General Stock index and inflation relationship is mentioned
below-

Hypothesis:
H0: = 0 [General stock index and inflation are not correlated]
H1: # 0 [General stock index and inflation are correlated]

Decision rule:
We will reject null hypothesis if the value of p (0.05) and accept null hypothesis if p value >
(0.05)
Correlation between General Stock Index and Inflation
General Index
Inflation
General Index
Pearson Correlation
1
.495
Sig. (2-tailed)
.175
N
108
108
Inflation
Pearson Correlation
.495
1
Sig. (2-tailed)
.175
N
108
108
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Table 8 Correlation between General Stock Index and Inflation

From the above table it is clear that the Pearson correlation between General stock index and
inflation is 0.495 which is very close to o.5, so we can say that there is no relationship available
between these two variables meaning they are negatively related. Since the p-value (.175) is
greater than is (0.05), the correlation test is insignificant and we cannot reject null hypothesis.
Therefore, we can say that these two variables are not correlated with each other. Meaning
inflation is not an important factor for general stock index.

8.3 Regression Analysis

Regression analysis is a statistical process of finding the relationship between two or more than
two variables. This includes many techniques for modeling and analyzing multiple variables. By
using regression analysis we can understand how the value of dependent variable changes with
the change of one independent variable while other independent variables remain fixed.
In our study we have run a regression to test the effect of the factors that can control the general
stock index.

Dependent Variable (Y)

Y = General Stock Index

Independent Variable (X)

X1 = Consumer Price Index (CPI)
X2 = Money Supply
X3 = GDP Per Capita
X4 = Inflation
X5 = Interest Rates
X6 = Exchange Rates

B0 = Constant
The estimated regression model is-

Y = B0 + B1X1 + B2X2 + B3X3 + B4X4 + B5X5 + B6X6

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Model Summary
Mo
R
R
Adjusted
Std. Error of the
del
Squar
R Square
Estimate
e
1
.952a
.907
.828
1095.84100
a. Predictors: (Constant), Exchange rate , Inflation, Interest
rate, Money Supply, GDP per Capita, CPI
Table 9 Model Summary

R-square is a statistical measure which shows how close the data are to the fitted regression line.
This term is sometimes also known as coefficient of determination, or coefficient of multiple
determinations for multiple regressions.
The value of R-squared explains the percentage of the response variable variation that is
explained by a linear model. If the value of the R is 1.0 then given the value of one term it can be
perfectly predicted the value of another term. If R squared is 0.00 then knowing one term does
not help us to know another term.
According to model summary R square value of our study is 0.907 that means 90% of the terms

8.3.1 ANOVA for Regression

H0: The model is not adequate.
H1: The model is adequate

Model

Sum of
Squares
1
Regression
23423624.688
Residual
19887567.996
Total
43311192.684
a. Dependent Variable: General Index

ANOVAa
Df
6
101
107

Mean Square
3903937.448
196906.6138

F
19.826

Sig.
.000b

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b. Predictors: (Constant), Exchange rate, Inflation, Interest rate, Money Supply, GDP per Capita,
CPI
Table 10 ANOVA

We already know that we reject null hypothesis if the value of p is less than significance level
which is 0.05. It is clear from ANOVA table that the significance level which is p value of 0.00 is
less than 0.05. Now, we can reject null hypothesis and can say that the model is adequate.

8.3.1 Coefficient
Hypothesis:

H0: The above independent variables have no significant effect over the dependent variable
H1: The above independent variables have significant effect over the dependent variable

Table 11 Coefficient

The coefficients (B) are the regression coefficients. The regression equation isGeneral Stock Index = -12128.624 1069.902 (CPI) + 1059.259 (Inflation) + 73.259 (Money
supply) + 263.697 (GDP per capita) -33.692 (Interest rate) -118.828 (Exchange rate).

From the above table it is clear that if inflation increases by one unit then general stock will
decrease by 17.168 units, meaning they are negatively related. Significant level is also greater
than p value (0.05). So, this is not significant. For inflation, one unit increase of inflation will
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lead to 0.898 unit increase of general stock index. They are positively related but as p-value
(0.2314) is greater than significance value (0.05). So, this is also insignificant. One unit increase
of money supply will help the general stock index to increase by 8.098 units. P-value is 0.001 <
0, 05. So, it is significant. One unit increase of GDP per capita will increase general stock index
by 9.779 units. P-value is 0.004 < 0.05, meaning this variable is also significant. Interest rate and
exchange rate both are negatively related with the general stock index. One unit increase of
interest rate will decrease general stock index by 0.053 and one unit increase of exchange rate
will decrease general stock index by 0.326 units. The p-value for exchange rate is 0.710 > 0.05
and p-value for interest rate is 0.315 > 0.05, meaning both of them are insignificant.

9. Revised Model
In previous model we have seen that money supply and GDP per capita are significant. Rest of
the variables Inflation, Interest rate, Exchange rate and Consumer price index (CPI) are not
related as p-value is greater than 0.05.
We have run regression again to test the effect of the factors that can control the overall measure
of general stock index.

New model isDependent Variable (Y)

Independent Variable (X)

Y = General Stock Index

X1 = Money Supply
X2 = GDP Per Capita

B0 = Constant
The estimated regression model is- Y = B0 + B1X1 + B2X2

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Model Summary
Model
R
R Square
Adjusted R
Std. Error of
Square
the Estimate
a
1
.884
.783
.732
1468.14183
a. Predictors: (Constant), GDP per Capita, Money Supply
Table 12 Model Summary (Revised)

R-square is a statistical measure which shows how close the data are to the fitted regression line.
This term sometimes also known as coefficient of determination, or coefficient of multiple
determinations for multiple regressions.
The value of R-squired explains the percentage of the response variable variation that is
explained by a linear model. If the value of the R is 1.0 then given the value of one term it can be
perfectly predicted the value of another term. If R squared is 0.00 then knowing one term does
not help us to know another term.
According to model summary R square value of our study is 0.783 that means 78% of the terms
are strongly related to each other.

9.1 Revised ANOVA for Regression

H0: The model is not adequate.
H1: The model is adequate.

Model

ANOVAa
Df

Sum of
Mean Square
Squares
1
Regression
15048157.457
2
7524078.729
Residual
10777202.227
105
102640.021
Total
25825359.684
107
a. Dependent Variable: General Index
b. Predictors: (Constant), GDP per Capita, Money Supply

F
73.30

Sig.
.000b

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Table 13 ANOVA (Revised)

We already know that we reject null hypothesis if the value of p is less than significance level
which is 0.05. It is clear from ANOVA table that the significance level (p-value 0.01 < 0.05) is
less than 0.05. So we can reject null hypothesis and can say that the model is adequate.

9.2 Coefficient
Hypothesis:
H0: The above independent variables have no significant effect over the dependent variable.
H1: The above independent variables have significant effect over the dependent variable.

Table 14 Coefficient (Revised)

General Stock Index = 18637.585 + 22.976 (Money supply) + 48.413 (GDP per capita)

From the above table it is clear that if money supply increases by one unit then general stock will
increase by 2.538 units, meaning they are positively related. P-value is 0.01 < 0.05, so this is
significant. One unit increase of GDP per capita will increase the general stock index by 1.795
units and p-value 0.00 < 0.05. So this is also significant.

10. Overall Interpretation

Our hypothesis wasMacroeconomics variable like Inflation, Interest rate (inter-bank), Money
supply, GDP per capita, Exchange rate and Consumer price index has the relationship with Stock
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market index (DSE). So research was conducted to find if there is any relationship available
between macroeconomic variables and stock market index or not. We started our study with six
independent variables like Interest rate (inter-bank), Money supply, GDP per capita, Inflation,
Exchange rate and Consumer price index (CPI).
After analyzing the data we have collected for research we found that our hypothesis is partially
right. Meaning we found some variables like GDP per capita and Money supply has relationship
with stock market index (DSE).
At correlation test we found that three variables are significant for stock market index (DSE).
These variables are Consumer price index (CPI), Money supply and GDP per capita. But while
coefficient testing we found only two variables are significant for stock market index (DSE).
These variables are Money supply and GDP per capita. Revised model (run with only two
factors- money supply and GDP per capita) also gave same result. Overall analysis do not found
any significant relationship with rest of the variables like Interest rate (inter-bank), inflation, CPI
and exchange rate.
So, we can say that only some of the macroeconomic variables like Money supply and GDP per
capita have relationship with stock market index (DSE).

10. Recommendation
Stock market is very important for industrial development. If people invest more in stock market,
it will help to create industrialization and industrialization will positively influence our economy.
We all know that it not possible for the government to develop economic condition but also the
private sector has very important role to play. So, to improve the stock market index (DSE) some
initiative can be taken. As we found that money supply and GDP per capita has relationship with
stock market index, government can use these two variables to manipulate stock market either
way (positively or negatively) if necessary.

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Government can increase the money supply if they think stock market index (DSE) should be
improved. More money in the market will motivate the investors to invest in stock market. But
we know that more money in the market also creates inflation which reduces the purchasing
power of buyers. So, this issue must be handled carefully.
As GDP per capita also has the influence with stock market index (DSE), government should
take necessary steps to increase the overall production of the country which is GDP per capita. If
GDP per capita improves people will be solvent and motivated to invest in stock market.

11. Conclusion

12. References
1.
2.
3.
4.
5.
6.

http://www.tradingeconomics.com/bangladesh/inflation-cpi
http://www.tradingeconomics.com/bangladesh/consumer-price-index-cpi
http://www.tradingeconomics.com/bangladesh/money-supply-m0
http://www.tradingeconomics.com/bangladesh/gdp-per-capita
http://www.tradingeconomics.com/bangladesh/interbank-rate
Dhaka Stock Exchange Library.

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