Macroeconomic Determinants of the Stock Market Index and Policy Implications: The Case of a Central European Country

This paper examines the relationship between Hungary’s stock market index and relevant macroeconomic variables. The GARCH model is applied in empirical work. It finds that Hungary’s stock market index has a positive relationship with real GDP, the ratio of the government debt to GDP, the nominal effective exchange rate and the German stock market index, a negative relationship with the real interest rate, the expected inflation rate and the government bond yield in the euro area, and a quadratic relationship with real M2 money supply. It indicates that there is a positive (negative) relationship if real M2 money supply is less (greater) than the critical value of 9,563 billion forints. If the quadratic relationship is not specified and tested, the positive coefficient of real M2 will be insignificant at the 10% level, and we may reach a misleading conclusion that the stock market index is not affected by real M2