Macroeconomic variables and stock returns of London Stock Exchange

This study examined impact of macroeconomic variables on stock returns of London Stock Exchange. The study considered data of secondary nature which was obtained from World Development Indicator, London Stock Exchange, Bloomberg databases and The Office for National Statistics. The data were subjected to autoregressive distributed lags (ARDL) models and Granger causality test. The study found a positive relationship between gross domestic product (GDP) and stock returns. It was revealed that inflation has a negative relationship with stock returns with coefficient value of 0.621885 at 5% confidence level. Additionally, the study revealed an inverse relationship between interest rates and stock returns with coefficient value of -0.659179 at 5% confidence level. Finally, the study revealed positive relationship between foreign portfolio investment and the stock returns with coefficient value of 1.006504 at 5% confidence level. The study concluded that macroeconomic variables affect stock returns of LSE. The study therefore recommends that government should manage the macroeconomic variables in such a way that will improve the performance of stock market.