Abstract

Increasing attention is being paid to the relationship between share prices and the macroeconomic variables by both economists and finance specialists. In the present-day scenario, where there is an increasing integration of the financial markets and implementation of various stock market reforms, the activities in the stock markets and their relationships with the macro economy have assumed significant importance. Economic agents use information in forming their expectations of future returns from holding stock securities. This study is an attempt to examine for Taiwan the casual relationship between index returns and certain crucial macroeconomic variable namely employment rate, exchange rate, GDP, Inflation and money supply.  The analysis is based on stock portfolios rather than single stocks. In portfolio construction, four criteria are used: Market capitalization, price/earnings ratio (P/E ratio), PBR and yield. The purpose was to make a finer point with respect to the relationship between economic growth and stock market especially in terms of stock prices. Empirical findings revealed that exchange rate and GDP seem to affect returns of all portfolios, while inflation rate, exchange rate, and money supply were having negative relationship with returns for portfolios of big and medium companies.

Key words: Macroeconomics, GDP, inflation, exchange rate, employment rate, money supply.