Exploring the Convergence of Macroeconomic Variables and Market Capitalization in an Emerging Economy: An Empirical Analysis Using Arbitrage Pricing Theory

Abstract

This study delves into the interaction between macroeconomic variables and market capitalization in Emerging Capital Markets, i.e., Bangladesh. We examine the effects of the invest-to-deposit ratio (IDR) by financial institutions, market interest rate (MKTINT), and Consumer Price Index (CPI) on market capitalization (MAKTCAP). This study utilizes a dataset spanning 83 months, encompassing the period from 2015 to 2021. The macroeconomic influence is examined empirically by using the Arellano–Bover/Blundell–Bond generalized method of moments (GMM) estimator, supplemented by the ordinary least squares (OLS) and weighted least squares regression (WLS). Also, use Breusch-Pagan and Cook-Weisberg tests to measure heteroskedasticity in the model. The findings show a strong correlation between IDR and MAKTCAP, pointing to IDR as the most important yet overlooked factor influencing capital market returns. However, MKTINT and CPI results address a negative relationship with MAKTCAP. Higher IDR indicates that the capital market receives more cash flow to enhance market capitalization. At the same time, lowering MKTINT and CPI enables the capital market to get more money flow.