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

• Main Authors: Aquilizan, Michael Blase V., Barandiaran, Aitor V., Gaw, Michael W., Mirpuri, Ravi H.
• Format: text
• Language: English
• Published: Animo Repository 2011
• Subjects: Gross domestic product > Philippines; Stock exchanges > Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/7886
• Institution: De La Salle University

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.