A correlation analysis on stock market returns with personal consumption expenditures, inflation rate and exchange rate to determine the existence and implications of the wealth effect theory as applied in the Philippine setting covering the period 1995-1999

• Main Authors: Bartolome, Ambry, Cardenas, Mary Kristen, Drilon, Janette, Perez, Vivienne Christine
• Format: text
• Language: English
• Published: Animo Repository 2000
• Subjects: Stock exchanges > Philippines
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/17051
• Institution: De La Salle University

In the context of the theory of wealth effect, an increase in money supply can lead to an increase in wealth mainly by its effect on stock prices. When there is an increase in money supply, interest rates would decrease. Business firms would then invest in the market. An increase in economic activity increases income. Business firms would be more profitable. There will be more demand for shares of stocks of firms, which will become profitable due to the expansionary influence on the firms. Such increase in demand would increase stock prices. As stock prices go up, people become richer, and thus spend more on goods. With the increase in the demand for good with limited supply, prices correspondingly increase the result then is in inflation. The proponents of the study basically want to test the applicability of wealth effect theory in the Philippine setting by identifying the relationship between the stock market performance and the economic indicators. Also, by determining the implications of stock market returns to inflation, it may be considered that the former can be used to improve inflation-forecasting models. Furthermore, the proponents want to determine if treasury bill rates can be used to restrain both inflation rate and exchange rate. The analysis covered a five-year period on a quarterly basis. The study shows that the wealth effect is not applicable in the Philippine setting. There is a very minimal relationship between the variables. There exists a positive relationship between the variables, except that between stock market returns and foreign exchange rate. Based on the study, stock market returns may be used as a tool to improve inflation forecasting models but not necessarily that effective. The treasury bill rates, as well, may be used as an effective tool to control financial performance of the economy, particularly the inflation rates. Such may have been due to the period in the study. The unavailability of the data on a monthly basis may also account for such results.