EXPLORING THE DETERMINANTS OFSTOCK PRICES: A STUDY OF

BANGLADESH STOCK MARKET USING OLS REGRESSION

A Term Paper Submitted in Partial Fulfillment of Econometrics (508) of the

Requirement for the degree of Master of Social Science (MSS)

Submitted To

Dr. Naim Uddin Hasan Awrangajeb Chowdhury

Associate Professor

Department of Economics, University of Chittagong

Submitted By

Mohammad Rashed Ibna Sattar

M.S.S (2020-2021)

ID: 17401082

Department of Economics, University of Chittagong

 Acknowledgement
First and foremost, I would like to thank Almighty who has made my journey easy and rewarding
with great pleasure, I give my deepest respect and sincerest appreciation to professor Dr. Naim

Uddin Hasan, Awrangajeb Chowdhury, Department of Economics, University of Chittagong,

for his expert guidance and valuable suggestions throughout this work. It would not have been
possible for me to carry out this study successfully without the continuous inspiration and
encouragement from his cordial supervision.

I express my devoted respect and affection to my parents and siblings and all the family members
and relatives for creating a delightful atmosphere as well as excusing me from family duties in
order to complete the study

And finally, I am really grateful to all of my friends, classmates and well-wishers of this
department for their thoroughly help and co-operation

Mohammad Rashed Ibna Sattar

Dated: 15 March, 2023

Contents
Abstract ......................................................................................................................................................... 4
Introduction .................................................................................................................................................. 5
Literature Review .......................................................................................................................................... 6
Research Gap ............................................................................................................................................ 7
Objectives of The Study ............................................................................................................................ 7
Data Source ............................................................................................................................................... 7
Methodology............................................................................................................................................. 8
Data Analysis: ............................................................................................................................................ 9
Analysis of Variance: ........................................................................................................................... 10
Confidence intervals ........................................................................................................................... 10
Findings: .................................................................................................................................................. 11
Test Of OLS Assumptions: ....................................................................................................................... 16
Summary ..................................................................................................................................................... 20
Conclusion ................................................................................................................................................... 20
References .................................................................................................................................................. 21
 Abstract
This paper examines the relationship between stock price and five independent variables, namely
GDP growth, inflation rate, real interest rate, foreign direct investment (FDI), and trade volume,
in the context of the Bangladesh economy. The study uses Ordinary Least Squares (OLS)
regression to measure the effects of these variables on stock prices based on a sample of 13 years
of data. The findings reveal that GDP growth, FDI, and trade volume have a significant positive
impact on stock prices, while inflation rate and real interest rate have a negative effect on stock
prices. These results have important implications for investors, policymakers, and other
stakeholders who are interested in understanding the factors that influence stock prices in
Bangladesh's economy.
 Introduction
The financial market is the primary metric of an economy since it allocates resources and generates
liquidity for firms and entrepreneurs, hence promoting the operation of productive activities. The
stability of the economy is ensured by a stable financial market, which improves capital formation
system. The stock market, which is the engine driving the global economy, is crucial for
coordinating savings and investments to organize the production of goods and services, create jobs,
and advance economic progress (Ahmed et al., 2014). One of Bangladesh's two stock exchanges
is the Dhaka Stock Exchange (DSE), with the other being the Chittagong Stock Exchange.

Understanding the success of financial markets and the overall economy depends heavily on stock
prices. Like many other stock markets, that of Bangladesh is a dynamic system that is impacted by
a variety of economic variables. Economists and investors alike have an interest in the correlation
between macroeconomic factors and stock values.

The Bangladesh stock market has experienced significant volatility and fluctuations in the past 15
years, driven by various domestic and global events. From the 2008 global financial crisis to the
2011 share market fall, and more recently, the COVID-19 pandemic and the Russia-Ukraine
conflict, these events have had a profound impact on the stock market's performance.
Understanding the determinants of stock prices in the Bangladesh stock market is crucial for
investors, policymakers, and stakeholders alike, especially in times of heightened uncertainty and
volatility.

The stock market's performance in Bangladesh over the past 15 years and help investors,
policymakers, and other stakeholders make informed decisions in the future. By considering the
impact of major events and economic variables, this study contributes to the broader literature on
the relationship between macroeconomic factors and stock prices in emerging markets like
Bangladesh.
 Literature Review
Investigating the Determinants of Stock Prices investigation has previously been undertaken by a
number of scholars. The researchers have utilized many types of models for this aim, according to
an initial scan of the literature.

Islam et al. (2017) examined the impact of macroeconomic variables such as GDP, inflation,
exchange rate, and interest rate on stock prices in Bangladesh using OLS regression. They found
that GDP and exchange rate have a significant positive impact on stock prices, while inflation and
interest rate have a negative impact.

Hossain and Islam (2019) analyzed the impact of macroeconomic variables and market risk on
stock prices in Bangladesh using OLS regression. They found that GDP, inflation, exchange rate,
and market risk have a significant positive impact on stock prices, while interest rate has a negative
impact.

Miah and Ullah (2019) investigated the impact of corporate fundamentals such as earnings per
share, dividend per share, and book value per share on stock prices in Bangladesh using OLS
regression. They found that earnings per share and dividend per share have a significant positive
impact on stock prices, while book value per share has a negative impact. They found that foreign
portfolio investment and market risk have a significant positive impact on stock prices, while
earnings per share and book value per share have a negative impact.

Ahmed et al. (2018) explored the impact of global financial crisis, political instability, and foreign
direct investment (FDI) on the stock market of Bangladesh. They used the ARDL approach and
found that FDI and political instability have a significant positive impact on the stock market,
while the global financial crisis has a significant negative impact.

Based on the analysis of the relevant literature, it can be presumed that OLS models are a perfect
choice for exploring the determinants of stock prices. The following section will explain the details
of the OLS model which will be used in this analysis.
Research Gap
Although previous studies have explored the determinants of stock prices in Bangladesh using
OLS regression, there is still a research gap to be filled. Specifically, there is a need for a more
comprehensive model that includes a wider range of variables, such as political stability, FDI, and
trade volume. This study aims to address this research gap by using an OLS model that includes a
comprehensive set of variables to analyze their impact on stock prices in Bangladesh.

Objectives of The Study

The general objectives of this research are to explore the key determinants of the BD stock prices.
The research pursues the following specific objectives as well.

1. To examine the impact of macroeconomic variables such as GDP, inflation, exchange rate,
and interest rate on stock prices in Bangladesh.
2. To analyze the impact of foreign portfolio investment on stock prices in Bangladesh.
3. To explore the relationship between the determinants and stock prices in the Bangladesh
Stock Market using OLS regression.
4. To provide recommendations for investors and policymakers based on the findings of the
study.

Data Source
The data sources used in this study include the Bangladesh Bureau of Statistics (BBS), the World
Bank, and the Dhaka Stock Exchange website. The BBS provides various economic and financial
indicators for Bangladesh, including grossdomestic product (GDP), inflation, and interest rates.
The World Bank provides data on global economic indicators, such as international trade and
foreign direct investment. The Dhaka Stock Exchange website offers information on stock prices,
trading volumes, and market capitalization for companies listed on the exchange. By utilizing data
from these sources, the study aims to identify the key determinants of stock prices in the
Bangladesh Stock Market through an ordinary least squares (OLS) regression analysis.
 Year Stock price Trade (% of GDP) Real Interest Rate( %) FDI (US $ in billion) Inflation Rate ( %) GDP Growth Rate( %)
2009 3747.53 40 6.1 0.9 5.42 5.05
2010 3920.36 38 4.7 1.23 8.13 5.57
2011 5093.19 47 5.1 1.26 11.4 6.46
2012 3877.64 48 5.3 1.58 6.22 6.52
2013 3973.28 46 6 2.6 7.53 6.01
2014 4753.17 45 6.9 2.54 6.99 6.06
2015 4724.04 42 5.5 2.83 6.19 6.55
2016 4540.89 31 -13.6 2.33 5.51 7.11
2017 4568.34 30 4.3 1.81 5.7 6.59
2018 6039.78 33 3.6 2.42 5.54 7.32
2019 5711.82 32 5.7 1.91 5.59 7.88
2020 4469.65 26 4.3 1.53 5.69 3.45
2021 5404.79 28 3.1 1.39 6.94 6.94

Figure: Data Source (Bangladesh Bureau of Statistics, BBS)

Methodology
The data of the sample 13 years of Bangladesh economy have been loaded onto GRE0TL data
sheet, used OLS and the program has been run to measure the effects of the independent variables
on Stock Price as being the dependent variable and the rest of the following 5 criteria being the
independent variables:

• GDP Growth

• Inflation Rate

• Real Interest Rate

• Foreign Direct Investment (FDI)

• Trade Volume

All data above for the sample of 13 years of the economy of Bangladesh have been obtained from
BBS, World Bank, and DSE website.
In this sense, we have a multiple regression equation:

Stock Prices = β0 + β1GDP Growth + β2Inflation Rate + β3Interest Rate + β4FDI +

β5Trade Volume + ε

Where,

o Stock Price = Stock Price

o GDP Growth = GDP Growth in (%)
o Inflation rate = Inflation Rate (%)
o Foreign Direct Investment = FDI (US $ in billion)
o Interest Rate = Real Interest Rate in (%)
o Trade Volume = Trade (% of GDP)

Data Analysis:
Model 1: OLS, using observations 2009-2021 (T = 13)
Dependent variable: Stock price
HAC standard errors, bandwidth 1, Bartlett kernel

Coefficient Std. Error t-ratio p-value

const 3087.21 667.738 4.623 0.0024 ***
Trade of GDP −78.8421 11.8763 −6.639 0.0003 ***
Real Interest Rate 53.9156 7.22595 7.461 0.0001 ***
FDIUSinbillion 333.719 111.720 2.987 0.0203 **
Inflation Rate 179.896 56.2431 3.199 0.0151 **
GDP Growth Rate 404.620 66.7103 6.065 0.0005 ***

Mean dependent var 4678.806 S.D. dependent var 723.5808

Sum squared residue 1653471 S.E. of regression 486.0146
R-squared 0.736827 Adjusted R-squared 0.548846
F(5, 7) 18.98310 P-value(F) 0.000607
Log-likelihood −94.84355 Akaike criterion 201.6871
Schwarz criterion 205.0768 Hannan-Quinn 200.9904
rho −0.484310 Durbin-Watson 2.942727
In equational form:

Stock price = 3087.21−78.84TradeofGDP + 53.91RealInterestRate + 333.71 FDI US in billion

(667.738) (11.8763) (7.22595) (0.988)

+179.89InflationRate + 404.62GDPGrowthRate

(56.24) (66.71)

T = 13, R-squared = 73.68

(Standard errors in parentheses)

Excluding the constant, p-value was highest for variable FDI US in billion.

Analysis of Variance:

Sum of squares df Mean square

Regression 4.62936e+006 5 925872

Residual 1.65347e+006 7 236210
Total 6.28283e+006 12 523569

R^2 = 4.62936e+006 / 6.28283e+006 = 0.736827

F(5, 7) = 925872 / 236210 = 3.91969 [p-value 0.0515

Confidence intervals: [t (7, 0.025) = 2.365]

coefficient 95 confidence interval
const 3087.21 [1508.27, 4666.16]

Trade of GDP -78.8421 [-106.925, -50.7591]

Real Interest Rate 53.9156 [36.8289, 71.0022]

FDI US in billion 333.719 [69.5438, 597.895]

Inflation Rate 179.896 [46.9024, 312.890]

GDP Growth Rate 404.620 [246.875, 562.365]

Findings:
On the model-1 summary above the value of R square is almost 9.7368, which indicates that almost
74% of the variations on the dependent variable are explained by the variability of the independent
variables. On the other hand, R which is the square root of R square shows the correlation between
dependent variable and independent variables. 74%% of R square means dependent and
independent variables are highly correlated.

The value of F is positive here which indicates the fact that most of the variations of the stock price
are being explained by the explanatory variables.

P-value of the variables GDP growth rate and trade of GDP are less than 5%, which means that
there is statistically highly significant relationship among the variables. For Real interest rate and
Inflation rate there shows a high rate of p-value which implies that effect of these variables on
Stock price is not statistically significant.

Table 1 shows the value of the constant is 3087.21, which implies that stock price, will be 3087.21
taka if all the explanatory variables takes a value of zero.

The value of the coefficient Trade of GDP is-78.8421 which indicates a negative relation between
the variables and it can be interpreted as, if trade is increased by 1% od the country's GDP stock
price will go down by 78.85 taka The coefficient of Real rate of interest (53.9156) implies that if
Real interest rate increases by 1% stock price will increase by approximately 54 taka. The
coefficient of FDIUS (333.719) implies that if foreign investment increases by 1 dollar stock price
will increase by approximately 333 taka The coefficient of inflation rate (179.869) indicating the
fact that if inflation rate increases by 19% stock price will go up by almost 180 taka. The coefficient
of GDP growth rate (404,62) indicates that if GDP grows by 1% stock price will rise by 404.62
taka.

Analysis of variance (ANOVA) table above shows F value is positive which implies that explained
variance is greater than unexplained variance and df (degree of freedom-residual is 7 which means
there are 12 observations in the dataset and 5 variables in the equation. To specify the position of
the system completely 7 is the number of independent coordinates exist there.
 Model estimation range:2009-2021

Standard error of residuals = 486.015

year Stock price fitted residual

2009 3747.53 3581.13 166.397
2010 3920.36 4471.38 -551.024
2011 5093.19 4741.76 351.434
2012 3877.64 3872.90 4.73834
2013 3973.28 4438.03 -464.748
2014 4753.17 4468.46 284.712
2015 4724.04 4780.63 -56.5880
2016 4540.89 4555.50 -14.6118
2017 4568.34 5249.68 -681.336
2018 6039.78 5445.57 594.213
2019 5711.82 5703.02 8.80299
2020 4469.65 4199.30 270.353
2021 5404.79 5317.13 87.6579
 FIGURE-1: ACTUAL VS PREDICTED VALUE
6500
actual = predicted

6000

5500
Stockprice

5000

4500

4000

3500
4000 4500 5000 5500
predicted Stockprice

FIGURE 2: STOCK PRICE VS TRADE OF GDP

 FIGURE 3: STOCK PRICE VS FOREIGN DIRECT INVESTMENT

Actual and fitted Stockprice versus FDIUSinbillion

6500
actual
fitted

6000

5500
Stockprice

5000

4500

4000

3500
1 1.5 2 2.5
FDIUSinbillion

FIGURE 4: STOCK PRICE VS GDP GROWTH RATE

Actual and fitted Stockprice versus GDPGrowthRate

6500
actual
fitted

6000

5500
Stockprice

5000

4500

4000

3500
3.5 4 4.5 5 5.5 6 6.5 7 7.5
GDPGrowthRate
 FIGURE 5: STOCK PRICE VS INFLATION RATE

Actual and fitted Stockprice versus InflationRate

6500
actual
fitted

6000

5500
Stockprice

5000

4500

4000

3500
6 7 8 9 10 11
InflationRate

FIGURE 6: STOCK PRICE VS REAL INTEREST RATE

Actual and fitted Stockprice versus RealInterestRate

6500
actual
fitted

6000

5500
Stockprice

5000

4500

4000

3500
-10 -5 0 5
RealInterestRate
 Test Of OLS Assumptions:
1. Normality:

0.0014
Test statistic for normality: relative frequency
N(-6.9961e-14,486.01)
Chi-square(2) = 0.841 [0.6566]

0.0012

0.001

0.0008
Density

0.0006

0.0004

0.0002

0
-1500 -1000 -500 0 500 1000 1500
residual

2. Multicollinearity:

Variance Inflation Factors

Minimum possible value = 1.0
Values > 10.0 may indicate a collinearity problem
Trade of GDP 1.949
Real Interest Rate 1.291
FDI US in billion 1.338
Inflation Rate 1.729
GDP Growth Rate 1.203
VIF(j) = 1/(1 - R(j)^2), where R(j) is the multiple correlation coefficientbetween variable j and
the other independent variables
Belsley-Kuh-Welsch collinearity diagnostics:
variance proportions

lambda cond const TradeofG~ RealInte~ FDIUSinb~ Inflatio~ GDPGrowt~

5.231 1.000 0.001 0.001 0.008 0.002 0.001 0.001
0.625 2.893 0.000 0.000 0.733 0.005 0.000 0.001
0.086 7.805 0.001 0.010 0.105 0.449 0.140 0.001
0.032 12.693 0.062 0.055 0.043 0.363 0.139 0.347
0.015 18.943 0.008 0.854 0.106 0.178 0.703 0.020
0.011 21.660 0.928 0.080 0.004 0.002 0.017 0.629
lambda = eigenvalues of inverse covariance matrix (smallest is 0.0111501)
cond = condition index
note: variance proportions columns sum to 1.0
According to BKW, cond >= 30 indicates "strong" near linear dependence,
and cond between 10 and 30 "moderately strong". Parameter estimates whose
variance is mostly associated with problematic cond values may themselves
be considered problematic.
Count of condition indices >= 30: 0
Count of condition indices >= 10: 3
Variance proportions >= 0.5 associated with cond >= 10:
const TradeofG~ FDIUSinb~ Inflatio~ GDPGrowt~
0.998 0.989 0.543 0.859 0.996

3. Autocorrelation:
Breusch-Godfrey test for first-order autocorrelation
OLS, using observations 2009-2021 (T = 13)
Dependent variable: uhat
 coefficient std. error t-ratio p-value
const 314.103 979.021 0.3208 0.7592
TradeofGDP 4.48568 22.6791 0.1978 0.8497
RealInterestRate 4.68148 27.1746 0.1723 0.8689
FDIUSinbillion −125.660 247.109 −0.5085 0.6292
InflationRate −78.1356 108.637 −0.7192 0.4990
GDPGrowthRate 39.1897 124.735 0.3142 0.7640
uhat_1 −0.650470 0.392905 −1.656 0.1489
Unadjusted R-squared = 0.313565
Test statistic: LMF = 2.740815,
with p-value = P(F(1,6) > 2.74081) = 0.149
Alternative statistic: TR^2 = 4.076347,
with p-value = P(Chi-square(1) > 4.07635) = 0.0435
Ljung-Box Q' = 3.7762,
with p-value = P(Chi-square(1) > 3.7762) = 0.052
4. Linearity:
Auxiliary regression for non-linearity test (squared terms)
OLS, using observations 2009-2021 (T = 13)
Dependent variable: uhat

coefficient std. error t-ratio p-value

----------------------------------------------------------------
const 9103.23 12189.1 0.7468 0.5330
TradeofGDP 7.31316 635.027 0.01152 0.9919
RealInterestRate −39.8360 142.745 −0.2791 0.8064
FDIUSinbillion −1150.37 4988.86 −0.2306 0.8391
InflationRate −1087.33 1699.96 −0.6396 0.5879
GDPGrowthRate −1621.32 2146.19 −0.7554 0.5288
sq_TradeofGDP 0.361086 8.00634 0.04510 0.9681
sq_RealInterestR~ −4.51494 15.3329 −0.2945 0.7962

sq_FDIUSinbillion 332.582 1263.06 0.2633 0.8170

sq_InflationRate 64.6850 100.977 0.6406 0.5874
sq_GDPGrowthRate 139.251 193.850 0.7183 0.5471
Unadjusted R-squared = 0.548219
Test statistic: TR^2 = 7.12685,
with p-value = P(Chi-square(5) > 7.12685) = 0.211376
5. Heteroskedasticity
White's test for heteroskedasticity
OLS, using observations 2009-2021 (T = 13)
Dependent variable: uhat^2

coefficient std. error t-ratio p-value

-------------------------------------------------------------------------
const −8.07004e+06 2.39721e+06 −3.366 0.0780 *
TradeofGDP 322557 124889 2.583 0.1229
RealInterestRate −21332.4 28073.3 −0.7599 0.5267
FDIUSinbillion 2.86448e+06 981149 2.920 0.1000
InflationRate −461866 334328 −1.381 0.3012
GDPGrowthRate 810790 422087 1.921 0.1947
sq_TradeofGDP −4286.68 1574.59 −2.722 0.1126
sq_RealInterestR~ −4257.25 3015.49 −1.412 0.2935
sq_FDIUSinbillion −707237 248403 −2.847 0.1044
sq_InflationRate 29050.0 19859.0 1.463 0.2811
sq_GDPGrowthRate −84050.1 38124.1 −2.205 0.1583

Unadjusted R-squared = 0.902623

Test statistic: TR^2 = 11.734095,

with p-value = P(Chi-square(10) > 11.734095) = 0.303247
 Summary
This study concludes that the GDP growth rate, trade of GDP, Real interest rate, FDIUS, and
inflation rate are significant determinants of stock prices in the Bangladesh stock market. However,
trade of GDP has a negative impact, while the other variables have a positive impact on stock
prices.

Conclusion
The model has a high R square value of 0.7368, indicating that 74% of the variations in the
dependent variable (stock prices) are explained by the independent variables (GDP growth rate,
trade of GDP, Real interest rate, FDIUS, and inflation rate). The ANOVA table shows that the
explained variance is greater than the unexplained variance, indicating that the model is significant.
The p-value of GDP growth rate and trade of GDP are less than 5%, indicating that there is a
statistically significant relationship between these variables and stock prices. However, the p-
values of Real interest rate and inflation rate are high, indicating that their effect on stock prices is
not statistically significant. The coefficient of Trade of GDP is negative, implying that an increase
in trade as a percentage of the country's GDP will lead to a decrease in stock prices. On the other
hand, the coefficients of Real interest rate, FDIUS, inflation rate, and GDP growth rate are positive,
indicating that an increase in these variables will lead to an increase in stock prices. The range of
the model estimation is from 2009 to 2021, and the standard error of residuals is 486.015. The
actual vs. predicted values and the scatter plots of stock price vs. trade of GDP and foreign direct
investment show a reasonably good fit of the mode
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