Relationship of Stock Price and Monetary Variables of Asian Small Open Emerging Economy: Evidence from Thailand

Abstract

Monetary variables contain information to forecast stock price is still controversial. This paper examines the relationship between stock price and monetary variables in Thailand which is an Asian small open emerging economy. Monetary variables are consumer price index, nominal bilateral exchange rate in term of bath per US dollar, narrow money, and 14 days repurchased rate, employing a multivariate cointegration, VECM, variance decomposition and impulse response analysis covering the period of January 1999 to December 2012 with 168 observations. The study found a long run relationship between monetary variables and stock price. There is no short run adjustment toward the long run equilibrium but narrow money and interest rate have significant short run effect on stock price. The bidirectional causality between stock price and inflation and between stock price and narrow money are found. A unidirectional causality is found from exchange rate to stock price and from interest rate to stock price. Variance decomposition indicates that narrow money and the interest rate contribute the highest in stock price while the variance in stock price give the highest contribution to exchange rate, narrow money and inflation respectively. The impulse response analysis indicates that the stock price responses intensively to narrow money and interest rate. The monetary variables response to the shock in stock price intensively after 2 months and all responses appear to divert away along the horizon which confirms the VECM result that there is no short-run adjustment towards the long run equilibrium. The relationship facilitates investor and policy maker in making effective investment decision as well as the efficient policy designation.