The relationship between stock market returns and fundamental economic activities have been well documented. . Specifically, how do these less developed markets respond to changes in its fundamental economic variables, when compared to the well developed, well organized, and more efficient markets like the U.S. stock market? The purpose of this study is to investigate the relationship between stock market returns and macroeconomic variables in the stock market, using regression models. We find the stock market incorporates information on macroeconomic variables in stock returns. The significant factors are the dividend yield, foreign exchange rate, oil price, and money supply. In summary, investors’ perceptions of stock returns in the market are quite different from those of developed country’s investors, suggesting that the developing country’s market is more sensitive to real economic activities rather than inflation or interest rate variables.
. In recent years, numerous studies modeled the relation between asset prices and real economic activities in terms of production rates, productivity, growth rate of GNP, unemployment, yield spread, interest rates, inflation, dividend yields, etc. However, the economic role of the stock markets in relatively less developed Asian countries (e.g. Korea, Taiwan, Singapore, Hong Kong, Malaysia, China, etc.) is less clear. Specifically, how do these less developed markets respond to changes in its fundamental economic variables, when compared to the well developed, well organized, and more efficient markets like the U.S. stock market?
During the last decade, stock market has experienced tremendous growth in both trading volume and market value in accordance with rapid economic development. The Korea Stock Exchange (KSE) is one of the most rapidly growing markets in the Pacific Basin and has become the eighth largest stock exchange in the world in terms of market capitalization as of 1990. However, the development of the financial sector in Korea has lagged far behind the real sector of the economy.