The Impact of Rule of Law and Other Macro-Economic Variables on Performance of the Stock Markets

This research study investigated the impact of rule of law and other macro-economic variables on the performance of the stock markets. The independent variables for the study are rule of law, real interest rate, consumer price index inflation, gross capital formation, gdp per capita and trade. In the study, some of the advanced and emerging countries are selected. The data is examined annually from 2005 to 2015 in panel form. The measuring variable for the study which correlates the performance of stock markets with the economy is stock market return. To estimate the relationship Pearson correlation, regression analysis and descriptive statistics tests have been used. Regression analysis is performed in two models, one with rule of law and one without it. The results indicated that there is a significant relationship between real interest rate and the stock market return and a significant relationship between the stock market return and the inflation rate is also observed, this shows that whenever there is an increase in inflation and interest rates of an economy that will inevitably lead to the increase in the stock market performance of that economy. Rule of law makes an expressive impact on the research, a significance between rule of law and stock market return is seen which means that whenever the law and order is implemented the stock market performance tends to be increased. On the other hand, GDP, gross capital formation and trade shows insignificance with the stock market return. Most of the results are supporting the theories and literature