The predictive content of GDP growth and inflation for stock returns and volatility: Evidence for Philippine stock market efficiency

Date of Publication

2011

Document Type

Bachelor's Thesis

Degree Name

Bachelor of Science in Management of Financial Institutions

Subject Categories

Finance and Financial Management

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management

Thesis Adviser

Junnette Perez

Defense Panel Chair

Rene Hapitan

Defense Panel Member

Christian Romagos

Carmelita Clerigo

Neriza Delfino

Abstract/Summary

Studies arrive at different conclusions regarding relationship of gross domestic product (GDP) growth and inflation to stock returns and its volatility. These results are heavily dependent on the country and period under observation. Even so, there is a general agreement within the literature that theoretically, GDP growth increases stock returns, while inflation has the opposite effect. The effect of the independent variables on the volatility of stock returns, however, is more ambigous because our review of the literature reveals no strong governing theory involved. We argue that since numerous studies classify the Philippine stock market under weak-form efficiency, economic variables such as GDP growth and inflation may be statistically significant predictors of stock returns. This study uses domestic macroeconomic and financial data on GDP growth, the consumer price index (CPI) and the Philippine Stock Exchange index (PSEi). We primarily use a generalized autoregressive conditional heteroscedasticity (GARCH) model, but also test the data using OLS. Robustness tests are done to account for changes caused by recent time periods, the 2008 global financial crisis and headline vs. core inflation. We find that GDP growth was but no longer is a significant predictor of stock returns, leading us to hypothesize that the efficiency in the Philippine stock market may be increasing. Also, inflation has significant predictive power for volatility and may be used as an informational tool to mitigate risk when trading equities.

Abstract Format

html

Language

English

Format

Print

Accession Number

TU21596

Shelf Location

Archives, The Learning Commons, 12F, Henry Sy Sr. Hall

Physical Description

143 leaves : illustrations (some color) ; 28 cm.

Keywords

Gross domestic product--Philippines; Stock exchanges--Philippines

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