Impact of Macro Fundamental Factors on Financial Volatility: Evidence from Financial Sectors of Bangladesh
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Introduction: Continuous fluctuation or volatility of stock prices cannot ensure a stable stock market which ultimately leads the economy in a vulnerable condition. However, return from the stock market largely depends on taking the right decision at the right time about the investment in the stock market. The main obstacle for investing in the Bangladesh stock market is the continuous volatile condition of the market. Different economic and non-economic factors are the reason behind this volatility. Different business institutions cannot raise capital smoothly from a volatile stock market and so, business growth is hampered which ultimately affects the overall economic growth of Bangladesh. Purpose: There are many macro fundamental factors related to stock price volatility. Some factors may directly affect the volatility with different levels of intensity (Njoroge 2015, Oluseyi 2015, Barakat, Elgazzar et al. 2016, Ndunda 2016, Nikmanesh and Nor 2016, Cai, Chen et al. 2017, Feng, Lin et al. 2017). Some other factors may indirectly affect or others may not affect the volatility at all in a particular economy (Haider, Hashmi et al. 2017, Okoro 2017, Romero 2017). The main purpose of this study is to find out which macro fundamental factor (BM, DBD, DCP, NPL, RE, TO) plays the most vital role in stock price volatility concerning to all the financial institutions of Bangladesh by finding the relationship between financial volatility and that particular factor. Methodology: This study has been forwarded based on the 46 years of empirical data starting from 1976 which ends with 2017 related to all financial institutions in Bangladesh. By using the OLS based ARDL model, this study has tried to reach the main objective. Before using the ARDL model, a unit root test has been conducted to find out whether there is stationarity or not in the time series. The combined result of three types of unit root tests such as ADF, PP, and KPSS gives strong evidence to make a decision about the presence of stationarity. After that, Linear ARDL Bound Testing has been used to find whether there is any long-run relationship among all the variables or not. Then, the main ARDL model has been used to find the Page | 6 particular relationship between financial volatility and one independent variable for both the long run and short run. At the very end, the residual test has been conducted to support the result found from ARDL test. Findings: After conducting the ARDL test, this study has developed a relationship of six macro fundamental factors with volatility separately which is either positive or negative. It has been found that financial volatility has a positive relationship with broad money and domestic credit by financial sectors, but between these two; volatility has the strongest positive relationship with broad money. On the other hand, domestic credit to private sectors; non-performing loans; remittance inflow; and trade openness have a negative relationship with volatility. Among these relationships, financial volatility is maintaining the strongest negative relationship with domestic credit to private sectors and remittance inflow. These findings have been found for both the long run and the short run. Implications: Though this study has focused on six macro fundamental factors, there are also other economic and firm-specific factors that also affect the financial volatility of the stock market of Bangladesh. However, these six can be considered the most vital macro factors in the context of Bangladesh. Now, if the investors no matter the investor is individual or any business institution know the actual relationship of these six factors with financial volatility, then they will be able to take the right decision about when to invest in the stock market and to which extent. Along with this knowledge of this study, if they have knowledge regarding firm-specific and other remaining factors, then there is a high chance that they will not face loss from the stock market and slowly, the market will be efficient and structured after getting the stability. Thus, the business institution will be able to raise capital from this market smoothly.
- Finance