Economic Forces and the Stock Market Performance in Developing Countries: Evidence From Sudan

Abstract

This paper is an attempt to empirically investigate the determinants of the stock market performance in Sudan. It aims at identifying the short and long run relationships between the Khartoum Stock Exchange all- share price index (KSI) as an indicator of market performance and some selected micro and macro-economic factors. The inflation rate, cost of capital, foreign exchange rate, broad money supply, and crude oil price are chosen as proxies for macroeconomic factors. The market oriented indicators used include market capitalization, market trading system, and market trading volume. The study covers the period 2003-2017. The paper employs the Multivariate Time Series Regression Analysis to estimate the short run relationship between the selected independent variables and the KSE price index. Soren Johansen’s Cointegration Test and Vector Error Correction Model (VECM) have been employed to identify the long run equilibrium relationship among the variables. To estimate the causal relationship between the selected variables Toda-Yamamoto (T-Y) Granger Causality Test has been utilized. The study documents that the Khartoum Stock Exchange performance is significantly affected both by micro and macroeconomic factors. In the long run, all the independent variables with the exception of the cost of capital, have a significant positive relationship with KSI. However, in the short run the determinants of the stock market performance are market capitalization, market trading volume, money Supply, and cost of capital.