Macroeconomic variables and stock prices in a small open economy: The case of Singapore

Using a subset of macroeconomic variables (narrow and broad money supply, nominal exchange rates and foreign currency reserves), that are especially pertinent in the context of a small open economy, this paper tests for the presence of informational inefficiencies in the Singapore stock market. The paper uses the techniques of cointegration and causality together with forecasting equations to test for informational inefficiencies in both the long and short run respectively. The results indicate that three of the four macro variables are cointegrated with stock prices, suggesting potential inefficiencies in the long run. The causality tests and forecasting equations provide conflicting evidence on the informational efficiency of the stock market in the short run. Finally, the implications of these findings at both the macro and micro level are discussed.