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Financial market development and returns is one of the main goals for
government macroeconomic policy of every country in the world. There are
numerous reasons to why a stock returns an important role in reflecting over all
of the countries economy. The stock volatility could affect the investment
decision in capital market which led to a decrease or increase in the equity flow
depending on the risk averse of an individual.

At the present time, as the processes of world economic integration are actively
being developed, close coordination of economic systems and creation of single
markets and market infrastructure are occurring. Integration of the Russian
economy into the global economic system is accompanied by processes stimu
lating the financing of the economy primarily by means of exogenous factors
which are foreign to Russia, i.e., by the high price of oil and, correspondingly, by
a fairly large net trade balance and current accounts balance, as well as by
means of an influx of outside capital. The Russian stock market is believed to
advance not by means of internal sources but using external sources. At the
moment, there is some controversy concern ing the influence of different factors
on the develop ment of stock markets [19]. In this paper, we have analyzed the
impact of external and internal condi tions in terms of stock exchange activity
(MICEX). The goal of the research is to evaluate quantitatively the influence of
internal economic factors on the Rus sian stock market.
Literature Review:
Many studies have been extensively investigated the empirical link between
stock market return and macroeconomic factor. Since the introduction of future
market, the Arbitrage Pricing Theory(APT), developed by Ross (1976) has been
variously used to link between these factor. He states that the variance of
information flows would specify the change in stock price leading to the fact that
the future market may deliver a predictive information, this can influence the
volatility in price. In constrast, Martinez and Rubio (1989) used the APT theory in
Spanish market and they established that there was no substantial pricing
association between financial market and the macroeconomic variables. Besides,
they discovered that the multifactor-APT with macroeconomic variables fails to
explain the size effect in stock returns, and hence unable to use for prediction either
in the Spanish and UK stock market.
The APT (Ross, 1976) lays the foundation of how expected returns of a financial asset
could be explained through various macroeconomic indicators. The goals were to
clarify the expected returns over time and to find the degree and direction of impact
of these factors, taken into consideration. The following empirical studies earlier
focussed on developed countries, but quickly brought in many emerging economies.
Chen et al. (1986) linked returns on New York Stock Exchange to macroeconomic
variables like industrial production, inflation, etc. Mukherjee and Naka (1995) found
there is long-run relationship between stock returns and six macroeconomic

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variables in Japan using a Vector Error Correction Model (VECM), including inflation,
interest rate and index of industrial production


A variety of papers have investigated the empirical link between interest rates and
stock returns. The inverse relationship between the two variables is explained by
Bernanke and Kuttner (2005), ), who consider three cases. First, higher interest rates
increase interest expenses of the firm, decreasing the cash flows available for future
dividends. Second, a change in interest rates could drive an expected rise in the real
interest rate, making future nominal cash flows less valuable to shareholders. Third,
a tightening in monetary policy could increase the expected equity premium, as
investors move away from stock investments.
For India, impact of oil price and money supply was found to be negative, while
industrial production and inflation showed positive impact. In the short run, only
inflation has a significant negative impact. Lai et al. (2013) used Vector
Autoregressive (VAR) technique to find dynamic interactions between stock indices
of Taiwan, Hong Kong and China with their respective indicators. So, empirically it
has been well established that stock indices of a country are affected by their
macroeconomic variables and have a longrun relationship with them.
According to Fisher (1930), in an efficient market, the nominal interest rate fully
reflects the available information concerning the possible future rates of inflation.
Thus, the expected nominal interest rates on financial assets should have a linear
one-to-one movement with expected inflation. Over the years, the Fisher effect has
also been extended to the stock market (Choudhry 2001). Nevertheless, empirical
studies commonly yield controversial results, mainly by finding negative
relationships between stock returns and the interest rate (Du 2006; Hondroyiannis
and Papapetrou 2006). Hasan (2008) suggests that higher interest rates can reduce
the demand for equity instruments by increasing the demand for fixed income
instruments. However, Scruggs (1998, p. 595) suggests that two distinct effects of
interest rates on stock returns have been the focus of a considerable amount of
research in finance literature. The first is the positive relationship between stock
market volatility and short-term interest rates and the second is the negative
relationship between the market risk premium and short-term interest rates (see
Campbell 1987; Fama and Schwert 1977; Ferson 1989; Glosten et al. 1993; Scruggs
1998; Whitelaw 1994). Thus, interest rates might play different roles in the stock
market performance, especially when stock market risk and volatility are considered.
Interest rate, exchange rate and inflation have some influence on the performance of
stock market. (Blanchard, 1981) described the relationship of output, stock market
and interest rates. He stated that higher stock money lowers interest rate which
means lower cost of capital and in turn causes better stock market value.
Typically, studies of exchange rate and interest rate exposure are based on
estimation of models which are extensions of the basic market model to two and
three factor models. Similarly, here, a linear factor model (Burmeister and McElroy,
1988) is used to justify the use of market returns, interest rates and exchange rates

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as factors in the estimation of a model of state variables that impact all industry

Macroeconomic factors and Stock returns:

One of the most important factor is interest rate where its determine a stock
volatility, there are various view on different county (Rigobon and Sack 2004) . Fama
(1981) believe that stock prices are reflected by inflation, interest rate and exchange
rate. A research claimed that in Russia and the US, there are a single cointegrating
vector which stock prices are positively linked to industrial production and negatively
CPI and interest rate (Andreas and Peter 2009).
Accordingly, Hassan et al. (2012) used a linear regression model, they found that
there is a positive long-run connection between stock market and interest and a
negatively with exchange rate. Savasa and Samiloglub (2010) and Shabri (2007)
used the same approach studies for Turkey and Malaysia correspondingly, they found
that interest rate has a negative correlation to both long and short run on stock
market. In addition, Hosseini et al. (2011) examined a Chinese stock market appears
to have positive relationship on inflation, whereas of interest rate is positive but
Research conducted by Schwert (1989) revealed that variation in interest rate and
inflation has weak predictive power for stock return in the US. Hence, it will cause
movement in stock prices. Davis and Kutan (2003). A study had extended Schwerts
work in different countries and achieve the same result of where interest rate has a
negative impact (_____).
Until recently, a new study using a GARCH model proved that inflation is a significant
determinant of stock return in case of Nigeria but devise a weak effect in Brazil
(Omorokunwa and Ikponmwosa 2014). To achieve a stronger view on how interest
rate, affect various market globally, (Caner and Onder, 2015) use Vectorautoregression model in 18 emerging and 2 developed countries. The end result was
that the short-term interest contributed approximately 4% of stock market volatility
in emerging country while the it is not significant in 2 developed countries (U.S.A and
Money supply:
Owing to a money-supply,

Fama (1981) implied the role of aggregate money supply in the context of stock
movement. The surplus of money supply generates a rise in good consumption,
hence, more money flow and investment in financial market (Moosa 1988). Mustafa

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(2008) concluded that the relationship of broad money-supply (M2) does not affect
stock price(insignificant) in long-run, however it does in the short-run for the US
financial market.
In contrast, another research came up with the theory that money supply affect the
stocks return. The reason is that equity is not comparable to the consumer where
exists an ending customer, they are for reselling and speculation. However, the
result did not provide a clear symptom that investment could lead to the movement
of stocks price (Caginalp 2011)
There are opposing theories to by what means money supply affects stock market
prices which was established by the real activity theorists, Peter Sellin (2001). He
claimed that the money supply will continues to affect the market only if the
expectation of future monetary policy is rehabilitated by a modification in money
supply, where a positive supply shock will lead individuals to expect up coming
tighten policy as well as a decrease in interest rate would dampen countries stock
return. However, Keynesian ,economists argue that there is a negative relationship
between stock prices and money supply.
Many studies have been done, however, different result were achieved. The
economists involved in this discussion had disagree on the degree to which the
market is efficient, where the efficient market hypothesis hold that all available
information existing in the market is already implanted in the price in stock market.
Hence, they contend that altering in money supply would not disturb the stock return
(Corrado and Jordan, 2005). Moreover, Husain and Mahmood (2007) using VAR model
finds that money supply is negative and not a significant variable in determining
stock they concluded that that the efficient market hypothesis does hold in the real
Crude Oil price effects on stocks market:
Since the famous Hamilton's (1983) research paper, there is a rising interest on the
effects of oil prices on stock market returns and on the economy.
Huang et al (1996) uses daily data to inspect the connection between the stock
markets and oil price using oil futures in the US. The observation was done by the
famous VAR model as well as a simple Bivariate model to observe the lead-lag
relationship for the daily Data. They found no significant differences in the results
between the models, where exists a relationship among the two variable. However,
these result were contradicting to that of Jones and Kaul's (1996) in that oil price
futures are insignificant variable to the overall stock market returns, apart from the
case of oil corporations.
A study which was documented by Jalolov and Miyakoshi (2007) employing an EGARCH model with a monthly data of various countries range from 1995 to 2003.
They discovered that German market is more superior predictor of Russian market
returns than the US, due to their closer relationship, both politics and investment
concerns. However, they conclude that oil and gas is not a significant though
negative variable for Russian market returns, and point out that the one-step
prediction with the EGARCH model is worse than a prediction of the random walk
model.Nevertheless, by employing a similar model, Hayo and Kutan (2005) studied
Russian stock market returns monthly by employing an asymmetric GARCH model.
Indicating that a lagged values of MICEX, S&P500 index and Brent oil price are all
significant variables of the Russian financial market.

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According to Jones (2004), the raising in oil price will subject to higher in the
production cost which leads to a decrease in output of production and expect
earnings. In theory, he claimed that there are indefinite ways oil price could affect
the market, additionally, the raising oil price could also negatively impact on the
stocks return directly.
A recent study published by Filis (2009) observing the relationship of variable by
using VAR method and the cyclical components where CPI, Industrial Production,
Stock Market in Greece together with the effect of oil prices on these variables,
ranging from 1996 to 2008 are examined. He found that the Oil price exercises a
significant negative influence in the Greek financial market
Money Supply:

Data and Methodology.

Over 10 years of monthly data collected from DataStream Thomson-Reuter has been
used for this study ranging from December 2005 to December 2015. This includes
Russian MICEX stock index, Interbank rate, which has been used as a proxy for
interest rates, Money supply(M1) and Brent oil price which is the one of most
influential factors affecting economic worldwide especially in Russia and Middle-East.
The stock index was arranged as the dependent variable, besides, others
macroeconomic factor represent the independent variable accordingly. Owing to the
differences in units, the raw data were transformed into percentage change by
employing this formula:

OLS model
In this paper, the relationship between variables will be examined, an ordinary least square(OLS) will be
tested to examined the vigorous relationship between Russian Stock market return(stock), interstate
rate(interest), Money supply(M1.1) and Crude-oil price (Oil).
The OLS method question are as followed:
Yi = +1X1. + 2X2 + e (i = 1, ..., N) Or Stock= + 1
Where equation.
Description of Data:

The descriptive statistics were used in this study. To evaluate the degree of
dependency between stock returns and other variable, the following technique has
been adopted: the first technique, for measuring the connection among these
variables, we have used the Pearson Correlation method. This method considerate a
degree on how strong of relationship among these variables. Another method for
measuring the significance level of these macroeconomic variables, the multiple
linear regression analysis is employed in this research. These approaches prove that
whether this variable has a positive or negative impact.

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However, it is important to keep in mind that time series data analysis is subject to
the problem of spurious regression if the data is non-stationary, resulting in
unreliable results of the models constructed. So to avoid spurious regression, the unit
root test (Augmented Dickey Fuller test) will be conducted first to check if the time
series data is stationary. If the test shows that the data is non-stationary, the first
difference of the variables will be employed before conducting the 21 OLS method

Analysis Result:
Descriptive Statistics




Std. Deviation

























Valid N (listwise)


The table shows a summarisation of descriptive statistics for the selected dependent and
independent variables. Indicating that 120 monthly observations of all the variables have been examined to
estimate the following statistics while Mean defines the average number in the data, Standard deviation
interpretate the dispersion and range of the sequence. The maximum and minimum statistics dealings with
upper and lower bounds of the data.
The mean shows, averagely, the oil price has been decreasing with -1.4%,
highest plunge of -26.7% in one month, while other variable has a positive effect
during the study period. Although the stock return shows the detrimental of over
-28.77% in the same month. This could resulted from the Oil shock and lowering

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demand of oil in the economy where Russia being one of the largest oil exporter in
the world.

Start the result with

This shows that Stocks and Oil has the highest amplitude in comparison to the other
variable, observable through a higher standard deviation which can be observe in
the table______.
Linear Regression: OLS Method.
The next table shows the multiple linear regression model summary and overall fit
Durbin watsion
Auto correlation:
Dur-watson is used to determine whether there is an auto-correlation issues in the
Model Summaryb

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R Square

Adjusted R




Std. Error of
the Estimate




It can observe from the table__, Durbin Watson is 1.514, this considering as fairly
low. Indicating that model is opposing an autocorrelation issue, revealing that current
variable behavior is influenced by previous data. In case of stocks return, it indicates
that previous movement would somehow impact the volatility of stock price in
following day. Hence, a one-year data lag of dependent variable was added to the
model in acquiring to solve the autocorrelation. Subsequently, the PLR* equation
would be:

SI = +b 1Oil+ b 2IR+ b 3 M 1+b 4 lag1+e

After eliminating the autocorrelation by adding one more lag variable, the model
summary is achieved below:

The table shows values of R and R square which stance for multiple correlation and
coefficient of determinants. R shows the relationship degree among dependent and
independent variables while R square clarifies the amount of total variance in
dependent variable which is known by variation of the independent one. R =.569,
showing a fairly strong positive relationship between variable. Adjusted R of this
model is 0.300 with the R = .323, change in independent variable together explains
32.3% of the variance in the stock return (MICEX index).
The Durbin-Watson, a statistic test for auto correlation which has prior been
eliminated, d = 2.047, which is between the two critical values of 1.5 < d < 2.5 and
therefore we can assume that there is no first order linear auto-correlation in our
multiple linear regression data.
Linear Regression:
By using SPSS, the linear regression provides the result below:


Sum of Squares


Mean Square








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The next table is the F-test, the linear regression's F-test show if the null hypothesis,
there is no linear relationship between the variables or R=0. However, the result
shows very significant number; thus we can conclude that there is a linear
relationship between the variables in our model, thus reject the null-hypothesis.
F(2,115)=13.747 ; p<0.5








Std. Error








Collinearity Statistics































a. Dependent Variable: SI

Multicollinearity Test:
Multicollinearity is a problem that arises in the model when there is a high correlation
of at least one independent variable with a grouping of the other variables. However,
this can be interpreted from Variance Inflation Factor (VIF), as a general rule of
thumb, 0.2< VIF < 5 indicate that there are no issues regarding the multicollinearity
by indicating the magnitude of the inflation in the standard errors related with a beta
weight that is owing to multicollinearity, in this case all variable has no issues in
Multicollinearity (less than 5), hence, applicable to proceed with the analysis. Where:

The regression coefficient, B, signifies the amount the dependent variable will
change if the independent variable vary by one unit. The constant number reveals
the equations interception, indication of a 0.008-unit movement in Stock return if

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the change in Interest, Money supply and Oil price are = 0, all factor remains
The p-value(sig) is the measurement of statistical significance which allows to
determine If there is a relationship between variables, it test the null hypothesis.
From the table, Money-supply significant level is 8.3% which is higher than 5% (the
optimal level used by Fisher__), but lower than 10%, therefore MS is significant at
10% interval. Additionally, Sig level of inflation and oil price are presented as .002
and .000 and deemed to be significant respectively, which are lower than 0.5,
therefore the null hypothesis for IT and Oil are rejected.
After testing the null hypothesis, B value could be considered, the table shows 1.178
for MS and .395 for Oil accordingly, this explains that both of the variable has a
positive relationship to the stocks return, where 1-unit increase in Money supply will
cause stock price to upswing by 1.178 unit in the same direction, similarly to the oil
price, where other factors are held constant. Alternatively, interest rate shows a
negative relationship to where 1-unit increase in IT, stock price will decrease by
-1.127 unit.
The following equation shows the expected stocks return by using these 3

If you find a model that fits well, does that mean your predictors cause your
dependent variable? Why (not)?
Not necessarily. Think again of our three conditions. Regression models clearly
demonstrate whether or not the predictors are related to the dependent variable, so
that condition can be fulfilled. As for the condition of the relationship not being
caused by a third, underlying variable, regression does a better job than correlation
in that you can include other possible causes in the model. However, it is unlikely
that we will have included all possible variables. Finally, the time condition is not
demonstrated by regression analysis. When would you use regression rather than
correlation? Regression analysis has a number of advantages over correlation.
Firstly, it allows us to develop more accurate models by allowing us to include a
number of different predictors of an outcome we are interested in. As the relationship
of each individual predictor to the dependent variable is controlled for the
relationship with any other variables in the model, regression also gives a more
accurate picture of the strength of those
relationships. Regression analysis also provides us with a number of useful
diagnostics to test the validity of our models.

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In the output we can see that Pearsons r is -.274. So there is a modest relationship
between the two variables. The significance level is .000, which means the
relationship is
highly significant (and therefore it is likely that there is a relationship between the
variables in the population as well as the sample). The sign is negative, which means
as age increases, grade point average decreases. So on average older pupils have a

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lower grade point average. WEAK positive relationship BUT INSIGNIFICANT

Empirical Findings:

Result shows all the variables are significant to the model where R squared is 32.3 %
of the variance in stock prices are explained by the model, indicating a great result.
The result is comparable to some of the previous research and carrying a similar
result. However, in the past studies states that there is no relationship between
interest rate and Russian stocks market during the period of 1998 to 2008, yet again,
in this studies reveals that interest rate plays a major role by negatively impact the
stock market in accordance to other literature investigating another country as well
as other variable.

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The multiple regression analysis, reveal a direct and a significant linkage between
MICEX index and the oil price movement in Russia with a recession correlation of .
395, in aligned with the research done by(______) indicating a positive relationship
with the stocks market. This is support by the fact that Russia is accounted as one of
the largest oil producer in the world. In addition, Russia would benefit greatly, if the
oil price increase, having Oil and Gas as their main exporting, comprising of over
70% from the total export and accounting of over 30% in country GDP. By
transferring money into the economy, indicating a good sign. Hence, induce the
investor perception causing the stock market to surge. Evidently, this can be
observing in between 2005 and 2015, during the oil price collapsing, Russian
economy was in a shock, causing its money value to declined approximately 60% to
the US dollar and the MICEX index lost 20% of its value. Nevertheless, individuals
tends to be more risk averse, they are holding cash instead of investing in an equity ,
the confidence in the market lose ,so do the price.


Interest rate is one of monetary tools employed by Russia central bank aims to
stabilise the economy Result shows that interest has a negative impact on the stock
returns, this is in line with (____). Hypothetically, when demand surpass supply level,
the inflation will arise casing interest rate to decrease . The Policy approach would
try to increase the interest rate , hence the demand in money increases
arise, hence Central Bankmay want to stabilize economy by increasing interest rate
and as a result demand for money decrease which will eventually lead to reduction
of money in circulation. This contractionary monetary policy will have negative effect
on stock market in that, investors will prefer to invest in interest bearing assets as a
result of increase in interest rate and this will automatically reduce stock price.
Interest rate is also affects negatively on the dynamic movement of stock as it
influences the return from common stock. According to (Malkiel, 1982), this
systematic effect is caused by 2 reasons. An increase in inflation makes the value of
money decrease. Therefore, interest rate will increase afterward which will lower the
price of equity assets and also increase the borrowing cost of companies. Besides,
high inflation will force profit margin of some group of companies like public utilities
to decrease but increase the profit of natural resource industries. Similar to exchange
rate, an increase in inflation could cause both benefits and harms to different
companies in different sector in a market. Moreover, an increase in inflation rate
make high dividend paid to lower in value affecting the analysis of investors. This
causing the volatility index to increase
When the country's central bank increases interest rates. When employment and per
capita income in a country increase, the demand for its goods and services
increases, along with demand for that country's currency in the local market.

Money Supply:

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. Keynesian economists argue that there is a negative relationship between stock

prices and money supply
Model 1 shows that there is a positive relationship between changes in the money
supply and stock prices, as the coefficient for the actual change in M2 is positive.
These results support the real activity theorists argument that an increase in money
supply increases stock prices and vice versa.
The last determinant which has highest positive regression correlation amongst 3
variables (1.183) is money supply M1. Higher amount of money bumped into the
market may create wealth effect which means people have more incentive to pay
and invest more money and stock market is one of the most attractive market. The
excess of liquidity will influence the stock market. Furthermore, the tool to adjust
money supply in the market is monetary policy. The expansionary policies which
mainly lower the interest rate bring some effects to the stock market. Firstly, this will
make fixed equity like Treasury bond which is substitution channel of investment of
stock market, become less attractive. Another effect of the expansionary monetary
policy is that it will raise the incentive of investor to borrow money to invest in stock
market as the cost of borrowing decreased. Also, decrease in interest rate will reduce
the expense of enterprise in interest from banking debt thus higher the profit. These
changes would affect positively on the stock price. The reverse happens when
contractionary policy being executed to reduce money supply. Both raise the
volatility level of stock.
Several policy implications can be drawn Biniv Maskay from this study. The
government, in formulating monetary policy, must be aware of the fact that the
stock market responds more favorably to an increase in the money supply. The
government must also be conscious that stock prices tend to increase when the
government implements expansionary policy to increase GDP and decrease
unemployment rates.

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