Constructing Stock Market Performance Index and Identifying Its Determinants

Kelvin, Lee Yong Ming (2021) Constructing Stock Market Performance Index and Identifying Its Determinants. PhD thesis, Universiti Malaysia Sarawak (UNIMAS).

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Abstract

Existing stock indexes were inappropriate to reflect the stock market aggregate performance since it was suffering from several shortcomings. Moreover, the existing stock indexes only can be used to measure the stock market returns, but not the other aspect, such as stock market development or stock market liquidity. Generally, there are also two common methods, namely (i) market capitalization weighting method and (ii) price-weighting method could be used in constructing the existing stock indexes. Regardless of the types of weighting method, existing stock index tends to be heavily affected by the movements of overprice or large market capitalization stocks. In order to overcome the shortcoming, this study aims to develop an index, namely stock market performance index (SMPI) to measure the stock market performance in aggregate level. This study constructed the index by combining four different stock market indicators, which represented the stock market performance in four different aspects – (i) stock market development, (ii) stock market liquidity, (iii) stock market returns and (iv) stock market volatility. Principal component analysis had been used in determining the weightage to be assigned to four different stock market indicators. The indicator of stock market development carried the highest weightage, followed by stock market liquidity, stock market returns and stock market volatility. The SMPI ranged between 0 and 100, where 0 indicates the worst stock market aggregate performance and 100 indicates the best stock market aggregate performance. Generally, the results obtained shown that most of the countries had a better stock market aggregate performance in the year of 2009. The newly-constructed SMPI also found to be reliable as compared to the existing stock indexes. Besides that, this study intends to investigate the macroeconomic and institutional determinants of SMPI. This study revealed that foreign direct investment and inflation rate had a significant impact towards SMPI for the both developed and developing countries. Specifically, foreign direct investment positively affects the stock market aggregate performance, while the inflation rate negatively affects the stock market aggregate performance. On the other hand, this study also found that the increase in the rating for voice and accountability helps to enhance the SMPI of developed country. Whereas, the increase in the rating for political stability, government effectiveness, rule of law and control on corruption helps to enhance the SMPI of developing country The findings of this study is also expected to contributes to the existing literature by constructing the new index to measure the stock market aggregate performance and identifying its determinants. These may help the policymaker and stock market participants to analyse the aggregate stock market performance in an easier way and understand the significant macroeconomic factor or institutional factors that affect the Stock Market Performance Index (SMPI).

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