An Empirical Analysis of the Effect of the Foreign Direct Investment and Exchange Rate on the Stock Market of Bangladesh

Abstract

Purpose: This study aims to analyze the impact of the selected macroeconomic variables, Foreign Direct Investment (FDI) and Exchange Rate (ER), on the stock market of Bangladesh.
Methodology: Different models from econometric theory—such as multivariate regression analysis, the Granger causality test, the Johansen cointegration test, and the Vector Error Correction (VEC) model—were conducted to answer the research questions. Using the application software EViews 11, time-series data covering the selected variables from 1993 to 2019 were analyzed.
Findings: Empirical evidence from the study proves the existence of a significant causal link from the stock market toward FDI but does not indicate any significant causality with the Exchange Rate in the context of Bangladesh.
Limitations: Findings of the study need to be interpreted cautiously, as the joint impact of the selected macroeconomic variables on the stock market of Bangladesh yielded an inconclusive remark.
Originality/value: The contribution of this paper reflects on addressing the research gap regarding the simultaneous long-run and short-run behavior of the stock market, FDI, and ER from the perspective of Bangladesh.