Method: Discourse Scope for Antecedent Candidate Selection

Money supply is a key factor in stock market performance and various studies have singled out money supply as a monetary policy instrument on stock market indexes in the literature.

Lithman (2012) examine money supply and stock prices. Specifically it inquires what macroeconomic factors influence the stock market index. Given the high degree of equity correlation in the market, variables previously used for explaining the cross-section of expected returns are tested against the S&P500 index. The macroeconomic variables used are subjected to standard OLS and probit estimation. The properties of these estimators are then ascertained via simulation. Finally, bias-corrected maximum likelihood estimates are obtained via bootstrapping.

These variables generally perform poorly but the ability of money supply to explain index movements depends crucially on an underlying systemic analysis. In addition, indications of future specifications are derived from the simulation results.

Khabo (2002) evaluating the impact of monetary policy on a small and open economy in the case of the South Africa for the period 1960-1997 used M3 to measure monetary policy. The ordinary least square (OLS) method was employed, as well as the Augmented Dickey Fuller test to check for stationarity.

Norfeldt (2014) estimate the interaction between returns on the US stock market (Standard & Poor‟s 500 and Dow Jones Industrial Average), US monetary policy and the Investor Sentiment using a structural vector autoregressive (VAR) methodology. The full sample consists of observations spanning from January 2000 to November 2014.The different measures

52 of a monetary policy are the rate change (which has been separated in to an expected change and an unexpected change) and the growth rate of money supply (M2). The study finds that, on average, there is a significant relationship between an expected change in the fed fund target rate and stock market returns.

As regards the empirical relation between money supply and stock prices, Rozeff (1974) using granger causality finds that money supply variables offer no possibility of gaining abnormal returns. For efficient markets to hold changes in one variable should not systematically predate changes in another. This is in line with findings on the direction of causality.

Osisanwo and Atanda (2012) looking at the determinants of stock market returns in Nigeria using a time series analysis indicated that interest rate, CPI, previous stock return levels, money supply and foreign exchange rate are the main determinants of stock returns in Nigeria. Li (2012) investigate whether the European Central Bank‟s frequent funding action can strengthen the stock market or not, the actual relationship between money supply and stock market in Europe deserves research, especially during the debt crisis. The study was then verified by empirical analysis based on ADF unit root test and Johansen cointegration test. By creating cointegration model and Vector Error Correction Model and carrying on Granger causality test, further examinations revealed the interaction between money supply and stock market capitalization in the short and long term. The results suggest that stock market capitalization is conversely related to money supply in the long run, whereas money supply has positive impact on stock market capitalization in the short-term, but it‟s not the Granger reason of stock market capitalization.

Aziza, (2010) attempt to identify and establish the relationship between monetary policy and stock market performance and to determine if there are similarities of monetary policy in

53 developed and developing countries. The study using OLS establish that the supply of money alongside other variables like the condition of credit and the price level influence the performance of the stock market over the short, medium and long run period, these different variables exhibit different behaviours in various countries and the degree of their influence varies between countries.

Mukherjee and Naka (1995) considered the relationship between stock prices and several macroeconomic variables which include exchange rate, money supply, index of industrial production, inflation and interest rates. They used data for the period January 1971 to December 1990 on a Vector Error Correction Model. They revealed a positive relationship for all other variables except for inflation and interest rates were a mixed relationship was observed.

Muktadir–Al-Mukit, (2013) investigate the effectiveness and consequence of various monetary variables of monetary policy commenced by central bank on the stock market performance of Bangladesh using Co-integration technique, ECM and Granger Causality. The study discovered the existence of unidirectional causality from inflation, money supply and T-bill to stock market performance index.

Maysami and Koh (2000) investigating the conditions of the Asian market with OLS analysis revealed a positive relationship between the money supply and the development of the SGX index (Singapore stock exchange), confirming the hypothesis that a growth in the money supply will cause inflation, which causes a growth in future cash-flow and share prices. The same results confirm Maysami, Howe and Hamzah (2004), who discloses a positive dependence between money supply change and stock price evolution on Singapore stock exchange. However, Cagli, Halac and Taskin (2010) dealt with the relationship between money supply and stock

54 prices on another emerging market – the Turkish market. These authors did not confirm any co-integration between these variables.

The effects of the changes in macroeconomic factors (including the money supply) on the development of stock prices were discussed also by Shaoping (2008), who confirmed a very strong effect of the money supply on the development of stock prices in the period between 2005-2007. As stated, he found a long-term and stable relationship between stock prices and monetary aggregate M0, M1 and M2. Similarly, stock prices and money supply had a positive co-integration. The positive co-integration has thus resulted that the growth of money supply results in the rising prices of equity shares.

On the Japanese market, Kimura and Koruzomi (2003) using OLS regression method discovered no relationship between the change in the money supply and the development of stock prices.

Muktadir-AI-Mukit and Shafiullah (2012) investigate the impact of monetary policy variables on the performance of recent post crashed stock market of Bangladesh using different econometric approaches like Co-integration technique, Granger Causality and ADF Unit root test. Results reveal that repo rate has a positive influence on market index where inflation and money on market Index.

Raymond (2009) investigate the interrelationship between stock prices and monetary indicators for Jamaica using Co-integration technique, PP, Granger Causality, ADF and VECM to analyze M2, M3, InfR, IR and EXR. The results show that there are long term relationships between the stock market returns and the monetary variables examined. Granger Causality test shows that only M2 is a consistent predictor of the stock price impling that the central bank

55 could influence stock market growth by targeting M2, as this is a better predictor of future stock prices, rather than inflation, interest rate and exchange rate.

Agbonlahor (2014) evaluate the effectiveness of the Bank of England‟s monetary policy over these years under study on the UK economic growth using the major objectives of monetary policy variables. The study using granger causality finds that the inflationary rate and money supply are significant monetary policy instruments that drive growth in the UK.

Tsoukalas (2003) examined the relationship between stock prices and macroeconomic factors in Cyprus using the Vector Autoregressive model. The variables examined include exchange rate, industrial production, money supply, and consumer prices. The result of the study indicates a strong relationship between stock prices and all the macroeconomic factors.

Abakah (2009) examines the long and short-run relationships between monetary policy and stock prices as well as some selected macroeconomic variables as inflation and exchange rates in Ghana. The study using Co- integration technique, Granger Causality, ADF and VECM to analyze variables like M2, IR, InfR and EXR identified an expected long-run negative relationship between interest rates and stock prices and also between exchange rates and stock prices amongst others. Seong (2013) investigate further the evidence of the effect of monetary policy on the Singapore stock exchange using E&G Co- integration, E&G ECM and PG Causality test discover that there is a causal relationship between monetary policy in money supply both narrow and broad money supply and Singapore stock exchange performance.