Relationship Between Stock Price And Macroeconomic Factors: Interest Rate And Exchange Rate

Discussion

The main focus of the present analytic work was to investigate the relationship of stock price with macroeconomic factors interest rate and exchange rate. For this purpose, a time series data ranging from 28^th February, 2017 to 31^st January, 2022 was obtained which informed about the stock prices, interest rate and exchange rate. Overall, there were 60 observations in the data. The Predictivity Of Stock Price through interest rate and exchange rate was also examined to develop predictive models. By the term stock price, we understand the present amount that a share of stock is traded for over the market. In simple terms the maximum potential price through which a stock can be brought is the price of the stock. Stock price reflects to a company’s value. Higher the stock price for a company healthier is its financial condition and lower the price of stocks lesser is its financial health. Generally, higher rates of interest are known to have a negative impact on stock prices (Al-Abdallah and Aljarayesh 2017). Interest can be defined as the amount charged by a lender in addition to the principal on a borrower for the use of assets.  Exchange rate can be defined as the value of a country’s currency relative to the currency of another country (Fornaro 2015). Having a clear understanding of the relationship between interest rates and exchange rates with the stock prices can assist investors understand how changes in the macroeconomic factor can potentially impact their investments. Data driven decision making will allow investors to make better financial investments.

Descriptive analysis was performed on the obtained data. The analysis mainly focused on the measures of center and measures of spread (Sarka 2021) which are all summarised in table a. Measures of center included mean, median and the mode. The measures of spread or dispersion included sample variance, standard deviation and rage of the variables in the data (Kaliyadan and Kulkarni 2019). The average price of stocks in the sample data was $ 19979.091. The average stock price of the sample is actually the sum of all stock prices on all observed time points divided by the total number of observations in the sample (George and Mallery 2018). The median price of stocks in the sample was found to be $ 19905.745. Median is the observation in a data which occupies the middle position when all observations in the data are arranged in either increasing or decreasing order according to the magnitude of the observations (Kaur, Stoltzfus and Yellapu 2018). It was indicated that on 50 % of the observed time points in the observed data the stock price was equivalent to or greater than $ 19905.745. There was no modal observation for the price of stocks. Mode is that observation in a data which occurs the maximum number of times (Holcomb 2016). It was thus indicated that on no two time points in the observed time series data, the stocks had exactly the same price. The sample variance and the standard deviation are measures of how much the observations in a data are dispersed about the observed mean (Lee, In and Lee 2015). The observed sample variance for the price of all stocks was 3391746.1 and the standard deviation of the stock prices about the mean observed stock was $ 1841.669. The standard deviation has a large value meaning that the dispersion of the observed stock prices about the mean was very high. The maximum observed stock price in the sample was $ 24102.19 and the minimum observed stock price was $ 15101.13. the range of stock prices in the sample was $ 9001.06. Range is the measured difference between the maximum and minimum observed value in a sample (McCarthy et al. 2019).

Descriptive Findings

The average interest rate was observed to be 0.462 %. The median rate of interest was 0.521 %. This indicated that on 50 % of the observed time points the rate of interest was equivalent to or higher than 0.521 %. There was no modal observation for rate of interests meaning that on no two points of time was the observed rate of interest exactly same. The sample variance for rate of interest was 0.096 and the standard deviation of the rate of interest about the observed mean was 0.309 %. The maximum rate of interest among the observed months was 0.912 %and the minimum rate of interest was 0.025 %. The range for the rate of interest in the sample was 0.887 %.

The average exchange rate was observed to be 1.317. The median exchange rate was 1.316. This indicated that on 50 % of the observed time points the exchange rate was equivalent to or higher than 1.316. There was no modal observation for rate of exchange meaning that on no two points of time was the observed exchange rate were exactly same. The sample variance for rate of exchange was 0.002 and the standard deviation of the rate of exchange about the observed mean was 0.05. The maximum rate of exchange among the observed points of time was 1.421 and the minimum rate of exchange was 1.216. The range for the rate of exchange in the sample was 0.206.

Table a: Descriptive findings

From the line chart in figure 1. It was observed that there was an overall increase in the stock prices in the observed time frame from 28^th February, 2017 to 31^st January, 2022. The stock price had faced a major decline in the year on 31^st December, 2019 till 31^st March 2020 after which it had gradually increased.

Figure 1: Line chart demonstrating the variation in stock prices across the observed timeline

From figure 2 it was observed that the rate of interest had declined in the overall observed time frame. The rate of interest was found to show an increasing trend after 31^st August, 2017 till 31^st January, 2019 after which it gradually decreased. However, after 30^th November, 2021 the rate of interest showed a steep increase.

Figure 2: Line chart demonstrating the variation in interest rate across the observed timeline

Overall, the exchange rate had increased in the observed time frame. Random fluctuations in the exchange rates were observed. The exchange rate was the least at 31^st July, 2019 after which the exchange rate had increased gradually.

Figure 3: Line chart demonstrating the variation in exchange rate across the observed timeline

From the scattered plot in figure 4 it was observed that there was a negative association between stock price and interest rate. As interest rate increased stock prices were observed to have decreased. The association was however very weak as for increase in exchange rate there was very little variation observed for stock prices.

Figure 4: Scattered chart demonstrating the relationship between interest rate and stock price

Time Series Plots

From figure 5 it was observed that as exchange rate increased the stock price also increased. This indicated that stock price was positively associated with exchange rate. There was a moderate variation in the stock prices with the increase of exchange rate.  

Figure 5: Scattered chart demonstrating the relationship between exchange rate and stock price

Pearson product moment correlation analysis was conducted to investigate the relation of stock price with interest rate and exchange rate (Schober, Boer and Schwarte 2018). The Pearson correlation coefficient helps understand the strength of association and the direction of association between two variables. The correlation coefficient between variables interest rate and stock price was found to be -0.201 as shown in table d. Stock price was negatively associated with interest rate. The strength of association was very weak. The same observations were made from the scattered plot in figure 4 discussed in the previous section. A correlation coefficient lying between 0 and ± 0.3 is considered to be weak (Akoglu 2018). The correlation coefficient between stock price and exchange rate was 0.622 as shown in table e. This indicated that stock price was moderately associated with exchange rate. Correlation coefficient lying between 0.3 and 0.6 is considered to be moderate in terms of strength of association. Also, the direction of association between stock price and exchange rate was positive.

Table d: Correlation between stock prices and interest rate

Table e: Correlation between stock prices and exchange rate

Simple regression analysis was performed to understand the effect of rate of interest on stock prices (Montgomery, Peck and Vining 2021) summarised in table f. The regression was not statistically significant (F (1, 58) = 2.453, p = 0.123). This indicated that the coefficient associated with the independent variable was not different from 0. Further, the p – value associated with the independent variable interest rate in the regression was observed to be 0.12 which was greater than the level of significance 0.05 which indicated that the coefficient was not different from 0 (Arkes 2019). If the interest rate was 0, the stock price was expected to increase by $20532.68. Thus, interest rate had no significant impact on the stock prices. Interest rate could explain only 4.06 % of the variation in stock prices.

Table f:  Summary Output stock price against interest rate:

Another simple regression was conducted to assess the impact of exchange rate on stock prices summarised in table g. The regression was statistically significant (F (1, 58) = 36.705, p < 0.05). This indicated that the coefficient associated with exchange rate in the regression model was different from 0 (Darlington and Hayes 2017). The impact of exchange rate on stock prices was statistically significant as indicated by the associated p – value which was less than the level of significance 0.05 (Schroeder, Sjoquist and Stephan, 2016). For increase of exchange rate by 1 unit the stock prices increased by $ 22391.26. If the exchange rate was 0, the stock prices were expected to decrease by $9512.20. The R – squared value was 0.3876 which implied that exchange rate could explain 38.76 % of the variation in stock prices (Chicco, Warrens and Jurman 2021). 

Table g: Summary Output stock price against exchange rate

Conclusion

The report discussed about the analytic findings from the time series data of stock prices and macroeconomic factors interest rate and exchange rate. The average observed stock price from the sample was $ 19979.091. The average rate of interest was 0.462 % and the average exchange rate was 1.31. The stock prices were found to have increased across the observed overall time frame. Data revealed that the interest rate had declined over the overall time period. The exchange rate was found to have increased over the observed time frame. There were significant number of fluctuations in the exchange rate over time. There was very weak association between stock price and interest rate in the observed time frame. The relation between stock price and interest rate was negative. On the other hand, it was found that a positive association exists between stock price and exchange rate. The strength of relationship between stock price and exchange rate was moderate. A simple regression analysis revealed that interest rate had no significant impact on the stock price. Exchange rate had a positive and significant impact on the stock price. 38.76 % of the variation in stock prices could be explained through exchange rate.

References

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