An investigation on the impact of macroeconomic variables on stock market performance of G7 countries

This study intends to investigate the impact of exchange rate, interest rate and inflation rate on stock market performance of G7 countries which are United States, UK, Canada, Japan, Italy, Germany and France. The stock indices used in this study are Dow Jones Industrial stock index, FTSE all stock index, DAX stock index, SBF 250 index, Tokyo stock exchange index, Toronto stock exchange and Comit indices. This study employs annual data for 15 years which is from 2001 to 2015. The data is obtained from the Datastream database. An ordinary least square, fixed effect model, random effect model and fixed effect with robust standard error model are the tests used to achieve the objectives of the study. Empirical results of the fixed effect model with robust standard error show that inflation rate has a significant impact and positive relationship with the stock index movement. In particular, the regression result shows that for 1 percent increase in inflation rates the stock price would increase by 38 percent. The exchange rate and interest rate do not have any significant impact on the stock market index.