Is there a relationship between the Maltese financial markets performance and the Maltese macroeconomic activity?

Abstract

Purpose of the study: This study aims to explore the possible relationship/s that exist between the Maltese stock market and the Maltese macro-economy. The motivation for this study arises from the well-documented correlations between stock markets and macroeconomic variables in foreign contexts, which have not been sufficiently examined for the Maltese context. The study examines the dynamic interactions between the Maltese stock market and various macroeconomic indicators, including but not limited to the return of the Maltese stock Market inflation, interest rates, industrial production and money supply. In other words, the study seeks to determine the extent to which macroeconomic variables influence movements in the Maltese stock market. The findings of this research have the potential to illuminate the dynamic relationships among these variables, providing valuable insights for various stakeholders in the economy, including government, economists, and bankers. Furthermore, the results may assist these stakeholders in identifying strategies to foster growth in the local stock market, thereby allowing for greater opportunities for economic expansion and improving the effective allocation of surplus funds. Design: This study employs a purely quantitative methodology with an inferential approach. The data utilized in this study comprises monthly datasets obtained through various publicly accessible data portals. Initially, the utilized data underwent seasonal adjustment. Subsequently, specific variables within the dataset were subjected to logarithmic transformation. Following these adjustments, the dataset was subjected to unit root testing, co-integration testing, and the Vector Error Correction Model (VECM) testing, as delineated by the employed framework. This framework is well-established within the extant literature, which explores analogous relationships among the variables employed in this study. Fundings: The analysis indicates that short-term interest rates (STI) exhibit a significant negative correlation with the Maltese stock market, indicating that investors in Malta shift their preferences between equites and fixed-income securities in response to changing interest rates. Similarly, Long-term interest rates (LTI) also demonstrate a strong negative impact on the stock market, serving as indicators of future economic conditions that impact borrowing and investment, leading investors to reallocate their portfolios between equites and fixed assets based on the movement of LTI. Furthermore, policy rates (PR) also demonstrate a significant negative relationship with the Maltese stock market. [...]