Macroeconomic Determinants Of The Behavior of Kuwait Stock Exchange

Abstract

This paper is attempt to study the effect of macroeconomic variables and the behaviour of Kuwait stock exchange during the period from 1995 to 2005 using monthly data for both the market and its sub sectors. Interest rate, money supply, inflation, and. government expenditure are the macro variables used, while marl<ct activity is represented by the value of traded shares. Vector autoregression technique is employed to achieve this goal. The study indicates that macroeconomic variables have the expected but a limited impact on the activities of the Kuwait Stock Exchange. Concerning the size of the macroeconomic variables effect, the results show that macroeconornic variables have a long run but limited effect averaging 30%. However this effect varies across sectors with a range from 18% to 30%. In a closer look at the results, on average, inflation has the highest effect among the macro variables with an average of II%, followed by money supply with an average of 6%, then interest rate with an average of 4%, and finally government expenditure with an average of 2.6% On the other hand, the results indicate, on average, that a negative and long term effect of both interest rate and. inflation, a positive and. long term effect of money supply, and a positive and long term effect of government expenditure except for the insurance sector, These results are typical for emerging markets such as that of Kuwait Stock Exchange where speculation dominates the activities in such markets.