Macroeconomic indicators and stock market returns: a comparative analysis

Abstract

This study examines the impact of five macroeconomic indicators - employment rate (EMR), foreign direct investment net inflows (FDI net inflows), gross domestic product growth (GDP growth), gross domestic product per capita (GDP per capita), and inflation rate (INFR) - on stock returns across developed, emerging, and frontier markets from 2002 to 2022. A PMG/panel ARDL approach, along with various testing methods including Pedroni panel cointegration tests, is employed to investigate the empirical evidence for both long-term and short-term associations between these macroeconomic indicators and stock returns. The empirical results indicate a statistically significant long-term causal relationship between the macroeconomic indicators and stock returns in developed, emerging, and frontier markets, except for GDP per capita and inflation rate in frontier markets. Additionally, a statistically significant short-term causal relationship is found between the macroeconomic indicators and stock returns in developed and frontier markets, with the exception of FDI net inflows in developed markets and employment rate, FDI net inflows, and GDP per capita in frontier markets.