IMPACT OF MACROECONOMIC VARIABES ON THE PERFORMANCE OF THE NEPAL STOCK MARKET: EMPERICAL ANALYSIS USING THE VEC MODEL

The Stock Exchange plays a vital role for generating, investing, and growing the wealth and diversify portfolios. This study investigates the influence of macroeconomic variables on the Nepal Stock Exchange (NEPSE) performance, focusing on the lending interest rate (LIR), money supply (MS), and liquidity (LIQ). The objective of this research is to assess the long-run cointegration, evaluate the short-run dynamics and error correction, and conduct Granger causality tests to identify causal linkage. This study employs the vector error correction (VEC) model to analyze the determinants of the Nepal Stock Exchange (NEPSE) index from January 2005 to December 2024, utilizing 203 observations with the required lags. The study finds that there is a significant long-term relationship between NEPSE and MS, and a negative impact from liquidity. The results suggest that MS and LIQ exhibit significant effects on NEPSE, whereas LIR does not show a substantial long-term relationship. In the short-term, the study identifies weak short-term adjustments for LIR and LIQ but significant autoregressive effects for MS and NEPSE. Additionally, the Granger Causality Test reveals that money supply and liquidity have predictive power for NEPSE, with one-way causal relationships from MS and LIQ to NEPSE.