A conceptual model of stock market efficiency: Does economic uncertainty matter?
DOI:
https://doi.org/10.37134/jcit.vol7.8.2017Keywords:
Stock market efficiency, Economic uncertainty, Efficient market hypothesisAbstract
Many empirical works study the efficient market hypothesis by examining the relationship between the macroeconomic factors and the stock markets, however, there are scant studies focused on the economic uncertainty in a precise method by studying the stock market efficiency. The purpose of this paper is to propose the conceptual framework of stock market efficiency in economic uncertainty. The economic uncertainty, can be categorized into exchange rate uncertainty, monetary policy uncertainty (namely, interest rate uncertainty, money supply uncertainty), inflation uncertainty, and output uncertainty, and is associated with the stock market efficiency. The expected findings suggest that economic uncertainty contains useful information and is important in determining the stock market efficiency and could promote a better efficiency in stock market.
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References
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Mookerjee, R. (1987). Monetary policy and the informational efficiency of the stock market: the evidence from
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futures and options. Australian Journal of Business and Management Research, 1(7), 112.
Plihal, T. (2016). Stock market informational efficiency in Germany: granger causality between DAX and selected
macroeconomic indicators. Procedia-Social and Behavioral Sciences, 220, 321-329.
Ross, S. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13, 341-360.
Schwert, G. (1989). Why does stock market volatility change over time? The Journal of Finance, Vol. 44(5), 1115-1153.
Sharpe, W. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance, 19, pp. 763-781.
Sirucek, M. (2013). Impact of Money Supply on Stock bubbles. Acta Universitatis Agriculturae et Silviculturae
Mendelianae Brunensis, 61(7), 2835-2842.
Smets, F. (2002). Output gap uncertainty: does it matter for the Taylor rule? Empirical Economics, 27(1), 113-129.
Tatom, J. A. (1984). Interest rate variability: its link to the variability of monetary growth and economic
performance. Federal Reserve Bank of St. Louis Review, 31-47.
Taylor, L. (1994). Gap models. Journal of Development Economics, 45(1), 17-34.
Thornton, J. , & Molyneux, P. (1995). Velocity and the volatility of unanticipated and anticipated money supply in
the United Kingdom. International Economic Journal, 9(3), 61-66.
Aggarwal, R. (2003). Exchange rates and stock prices: A study of the US capital markets under floating exchange
rates. Akron Business and Economic Review, 12, 7-12.
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of
Economics, 131(4), 1593-1636.
Ben-Haim, Y., Demertzis, M., Den End, V., & Willem, J. (2017). Fundamental uncertainty and unconventional
monetary policy: an info-gap approach. Bruegel Working Paper Issue 1/2017.
Bernanke, B. S., & Kuttner, K. N. (2005). What explains the stock market's reaction to Federal Reserve policy? The
Journal of finance, 60(3), 1221-1257.
Caporale, G. M., Ali, F. M., & Spagnolo, N. (2015). Exchange rate uncertainty and international portfolio flows: A
multivariate GARCH-in-mean approach. Journal of International Money and Finance, 54, 70-92.
Cho, D., Eun, C., & Senbet, L. W. (1986). International arbitrage pricing theory: an empirical investigation. Journal
of Finance, 41, 313-329.
Choi, K. H., & Yoon, S. M. (2015). The effect of money supply on the volatility of Korean Stock Market. Modern
Economy, 6(05), 535.
Cochran, S. J., & DeFina, R. H. (1993). Inflation's negative effects on real stock prices: new evidence and a test of
the proxy effect hypothesis. Applied Economics, 25(2), 263-274.
Creal, D. D., & Wu, J. C. (2014). Interest rate uncertainty and economic fluctuations. National Bureau of Economic
Research Working Paper No. 20594.
David, A., & Veronesi, P. (2004). Inflation and earnings uncertainty and volatility forecasts. Manuscript, Graduate
School of Business, University of Chicago.
Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 52, pp. 383-
417.
Fama, E. F., & Schwert, G. W. (1977). Asset returns and inflation. Journal of financial economics, 5(2), 115-146.
Fratzscher, M. (2002). Financial market integration in Europe: On the effect of EMU on stock markets. International Journal of Finance and Economic, 7, pp. 165-193.
Friedman, B. M. (1984). Lessons from the 1979-82 Monetary Policy Experiment. The American Economic
Review, 74(2), 382-387.
Froyland, E., & Lonning, I. (2000). The significance of uncertainty in monetary policy. Norges Bank. Economic
Bulletin, 71(4), 136.
Gan, P. T. (2014). The optimal economic uncertainty index: A grid search application. Computational Economics,
43(2), 159-182.
Gazioglu, S. (2003). Capital flows to an emerging financial market in Turkey. International Advances in Economic
Research, 9(3), 189-195.
Geske, R., & Roll, R. (1983). The fiscal and monetary linkage between stock returns and inflation. The Journal of
Finance, 38(1), 1-33.
Groenewold, N., & Kang, K. C. (1993). The semi-strong efficiency of the Australian share market. Economic Record, 69(4), 405-410.
Habibullah, M. S., Baharumshah, A. Z., & Tan, H. B. (1998). Monetary policy, economic activity and the stock
market: An empirical analysis of the Kuala Lumpur Stock Exchange. Journal of Management (Jurnal Pengurusan),
17, 41-53.
Hasan, M. A., & Wadud, M. A. (2015). Testing Semi-Strong Form Efficiency of Dhaka Stock Exchange. Journal of
Business & Economics, 7(2), 213.
Hatemi-J, A. (2002). Money supply and the informational efficiency of the stock market in Korea: evidence from
an alternative methodology. Journal of Economic Integration, 517-526.
Humpe, A., & Macmillan, P. (2009). Can macroeconomic variables explain long-term stock market movements? A
comparison of the US and Japan. Applied Financial Economics, 19(2), 111-119.
Ilmanen, A. (2003). Stock-bond correlations. The Journal of Fixed Income, 13(2), 55-66.
Istrefi, K. & Mouabbi, S. (2016). Subjective interest rate uncertainty and the macroeconomy: A cross-country analysis.Banque de France Working Paper No. 619. Available at SSRN:
https://ssrn.com/abstract=2908197
Jeng, C. C., Butler, J. S., & Liu, J. T. (1990). The informational efficiency of the stock market: The international
evidence of 1921–1930. Economics Letters, 34(2), 157-162.
Lawal, M., & Ijirshar, U. V. (2015). Empirical analysis of exchange rate and Nigeria stock market performance. Int.
J. Sci. Res, 4(4), 1592-1600.
Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital
budgets. The review of economics and statistics, 13-37.
Liu, X., & Sinclair, P. (2008). Does the linkage between stock market performance and economic growth vary across Greater China? Applied Economics Letters, 15(7), 505-508.
Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of Economic Perspective, 17, pp. 59-82.
Markowitz, H. (1952). Theory of portfolio selection. Journal of Finance, 7, pp. 77-91.
Mishkin, F. S., & Eakins S. G. (1998). Financial markets and institutions. Second edition, Addison-Wesley, US.
Mittoo, U. R. (1992). Additional evidence on integration in the Canadian stock market. The Journal of Finance, 47(5), 2035-2054.
Mookerjee, R. (1987). Monetary policy and the informational efficiency of the stock market: the evidence from
many countries. Applied Economics, 19(11), 1521-1532.
Mosin, J. (1966). Equilibrium in a capital asset market. Econometrica, 34, pp. 768-783.
Nwosu, E. O., Orji, A., & Anagwu, O. (2013). African emerging equity markets re-examined: Testing the weak form
efficiency theory. African Development Review, 25(4), 485-498.
Olowe, R. A. (1999). Weak form efficiency of the Nigerian stock market: further evidence. African development
review, 11(1), 54-68.
Orabi, M. M. A., & Alqurran, T. A. A. (2015). Effect of volatility changes on emerging stock markets: the case of
Jordan. Journal of Management Research, 7(4), 132-143.
Oskooe, S. A. (2010). Emerging stock market performance and economic growth. American Journal of Applied
Sciences, 7(2), 265.
Parasuraman, N. R., & Ramudu, P. J. (2011). Historical and implied volatility: an investigation into Nse Nifty
futures and options. Australian Journal of Business and Management Research, 1(7), 112.
Plihal, T. (2016). Stock market informational efficiency in Germany: granger causality between DAX and selected
macroeconomic indicators. Procedia-Social and Behavioral Sciences, 220, 321-329.
Ross, S. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13, 341-360.
Schwert, G. (1989). Why does stock market volatility change over time? The Journal of Finance, Vol. 44(5), 1115-1153.
Sharpe, W. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance, 19, pp. 763-781.
Sirucek, M. (2013). Impact of Money Supply on Stock bubbles. Acta Universitatis Agriculturae et Silviculturae
Mendelianae Brunensis, 61(7), 2835-2842.
Smets, F. (2002). Output gap uncertainty: does it matter for the Taylor rule? Empirical Economics, 27(1), 113-129.
Tatom, J. A. (1984). Interest rate variability: its link to the variability of monetary growth and economic
performance. Federal Reserve Bank of St. Louis Review, 31-47.
Taylor, L. (1994). Gap models. Journal of Development Economics, 45(1), 17-34.
Thornton, J. , & Molyneux, P. (1995). Velocity and the volatility of unanticipated and anticipated money supply in
the United Kingdom. International Economic Journal, 9(3), 61-66.
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Published
2017-10-02
How to Cite
Yeap, S.-Y., & Gan, P.-T. (2017). A conceptual model of stock market efficiency: Does economic uncertainty matter?. Journal of Contemporary Issues and Thought, 7, 79–87. https://doi.org/10.37134/jcit.vol7.8.2017
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