LONG-RUN AND SHORT-RUN RELATIONSHIP BETWEEN STOCK MARKET INDEX AND MAIN MACROECONOMIC VARIABLES PERFORMANCE IN JORDAN

Abstract

This study aims to investigate whether the Amman Stock Exchange(ASE) performance, as measured by the stock price index, is affected by aset of macroeconomic variables. Namely, Real Gross Demotic Product,Consumer Price Index, Credit to Privet Sector, Weighted Average InterestRate on Time Deposit, and dummy variable explain the global financialcrises period. The data used in the study are quarterly data from 1992:Q1-20014:Q1. To examine whether this effect exists or not, Johansencointegration test and Vector Error Correction model (VECM), ImpulseResponse Function (IRF) and Variance Decomposition (VD) are employed.The empirical results indicate that there a long run equilibrium relationshipamong stock market index and the main macroeconomic variables in Jordan.The findings of the study have showed that the speed of adjustment in theVECM is significant and relatively slow. This implies that long runmovements of the variables are determined by one equilibrium relationship.The results also indicate that there is a bi-directional long run relationshipbetween stock price index and credit to the private sector, weighted averageinterest rate on time deposits, and consumer price index. The evidenceimplies that an increase in the weighted average interest rate on time depositsin the banking system has a greater effect on the stock price index than othermacroeconomic and financial variables.