Abstract:
Investment decisions are strongly influenced by macroeconomic variables because variations in
macroeconomic variables have different effects on stock markets relying on the economic conditions
and policies of the world. This study investigates the influence of four macroeconomic variables:
Foreign direct investment, Gross domestic product, inflation and interest rate on stock returns. The
analysis contributes by evaluating yearly data from 2000 to August 2014 to evaluate the effect of
different macroeconomic variables on stock market returns of low and middle income countries. As all the variables are stationary at first difference thus ideal ARDL approach of bound testing is applied to check long term effect of the macroeconomic variables on stock prices. The findings suggest that stock returns of low and m iddle income countries in long term are significantly affected by FDI and insignificantly affected by GDP, inflation and interest rate and also shows that there is strong relationship in long run. Granger causality tests is also applied on the data to estimate the possible impact of macroeconomic determinants on stock returns to find the causal relationship of
macroeconomic determinants with stock market.
