Macroeconomic Variables and Effect on Stock Prices: Correlation Evidence from Nepal

Abstract

This paper attempts to study the macroeconomic factors that affect the stock prices in Nepal. It considers the annual data of four macroeconomic variables that affect the NEPSE Index; inflation rate, broad money supply, gross domestic product, and per capita income from 2011-2021 and tries to find out the influence of these variables on the NEPSE index (stock prices). It uses the Pearson correlation matrix to study the relationship between stock prices ad macroeconomic variables. The results obtained from correlation analysis revealed that market performance of stock prices is found to respond positively to broad money supply and gross domestic product and negatively to the inflation rate as expected. Also, the NEPSE index is not affected by the changes in the per capita income of the nation. These findings help to build up economic and financial policies in the nation and stabilize the capital stock market in Nepal.

Stock Market Development and Economic Growth of Nepal

“…The government and policymakers have a growing concern for the stability of the stock market. The Nepalese stock market is more volatile and underdeveloped (Joshi, 2018;Ghimire, 2022;Panta, 2020) due to various reasons such as low investor awareness, manipulation and insider trading, inadequate regulatory framework and infrastructure, and political instability (Aggarwal & Wu, 2006;Dhungana, 2013;Karmacharya, 2023;Mainali, 2011). The stable and developed stock market expands market capitalisation and integrates the global market (Goetzmann et al, 2001;Pan & Mishra, 2018;Rousseau & Wachtel, 2000).…”