Analysing the Impact of Major Financial Crisis on Macroeconomic Variables and Stock Prices: An Empirical Study of Stock Market of United Kingdom

Abstract

The research paper empirically tests the impact of major financial crisis of 2008 by testing the causality between five macroeconomic variables (interest rate, inflation, money supply, GDP and exchange rate), the FTSE All-Share index and its sectoral indices. Furthermore, it analyses whether the global financial crisis of 2008 affected the direction of the causality or not. For this purpose the causality tests were performed in two sections one on the data for the pre financial crisis period  from 1999 to 2007 and another on the data for post financial crisis period from 2008 to 2022. The causality was tested using the quantile Granger causality test, the research findings reveal the complex causality between the UK stock market and the most prevalent macroeconomic factors. The findings of the research are suggestive that the causality between macroeconomic factors changed from pre-crisis period to post-crisis period. This is indicative of the event sensitivity of the stock market of UK.  It was found that the direction of this causality varies according to the circumstances of the economy and across different sectors involved, and particular economic conditions at various times. The findings of this research provide important insights for policymakers, investors, and economic analysts, as they shed light on the dynamic and complex relationship between the indicators, both on an aggregate and sectoral level. The research findings also emphasise the importance of considering the variables' distribution when analysing the issue of causality.