Empirical Analysis of Macroeconomic Determinants of Stock Market Performance: Evidence from the Nepal Stock Exchange using an ARDL Model

The objective of this research is to assess the empirical analysis of macroeconomic factors with the stock market performance. This study employs an Auto-Regressive Distributed Lag (ARDL) model to analyze the determinants of the Nepal Stock Exchange (NEPSE) index from September 2012 to June 2024, utilizing 139 observations with a maximum of four lags. The study includes NEPSE as the dependent variable and key macroeconomic indicators, including lending interest rates (LIR), consumer price index (CPI), and 91-day Treasury bill rates (TB91), as explanatory variables. The optimal model, ARDL (1, 1, 0, 1), is selected based on the Akaike Information Criterion (AIC). The results reveal a strong persistence in the NEPSE index, as evidenced by the significant coefficient of the lagged dependent variable (NEPSE (-1) = 0.97, p < 0.01), indicating that past values significantly influence current values. Lending interest rates exhibit a dynamic effect, with a negative immediate impact (-148.42, p < 0.01) and a positive lagged effect (124.38, p < 0.01), reflecting short-term challenges and long-term adjustments. CPI shows a negative but statistically insignificant relationship with NEPSE (-3.74, p = 0.51), suggesting minimal direct influence. TB91 demonstrates mixed effects, with an immediate negative impact (-14.39) and a lagged positive effect (16.26), both statistically insignificant. The model exhibits strong explanatory power, with an R-squared value of 0.96 and an F-statistic (592.88, p < 0.01), confirming overall significance. The Durbin-Watson statistic (2.00) indicates no significant autocorrelation.