Market Sensitivity to Economic Shocks: A Quantitative Assessment in an Emerging Economy

Emerging economies like Bangladesh have experienced rapid economic growth over the past two decades, yet remain highly sensitive to internal and external economic shocks. This study examines the dynamic relationship between key macroeconomic indicators, including inflation, interest rates, money supply, credit growth, exchange rates, bond yields, and unemployment, and their impact on stock market performance and GDP growth in Bangladesh from 2010 to 2023. Using a robust methodological framework, the study applies multiple linear regression, Augmented Dickey-Fuller (ADF) stationarity tests, Granger causality analysis, Variance Inflation Factor (VIF) diagnostics, and macroeconomic stress testing to assess both linear relationships and shock resilience. The results indicate that inflation exerts a weak but negative impact on stock returns while significantly boosting GDP. Unemployment reveals a counterintuitive positive association with both dependent variables. Most other macroeconomic variables, including interest rates and money supply, show limited statistical significance. Notably, bond yields Granger-cause GDP, highlighting the relevance of long-term rates in economic forecasting. Stress testing simulations underscore the economy’s resilience but expose capital market volatility under inflationary and currency devaluation scenarios. This study contributes to macro-financial literature by integrating econometric rigor with policy relevance in a frontier economy. The findings provide valuable insights for policymakers, investors, and analysts navigating Bangladesh’s evolving financial landscape.