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Effects of interest rate, exchange rate and their volatilities on stock prices: evidence from banking industry of Pakistan

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  • Syed Tehseen JAWAID

    (Iqra University, Karachi, Pakistan)

  • Anwar Ul HAQ

    (Iqra University, Karachi, Pakistan)

Abstract

This study investigates the effects of exchange rate, interest rates, and their volatilities on stock prices of banking industry of Pakistan. Cointegration results suggests the existance of significant negative long run relationship between exchange rate and short term interest rate with stock prices. On the other hand, positive and significant relationship exists between volatilities of exchange rate and interest rate with stock prices. Causality analysis confirms bidirectional causality between exchange rate and stock prices. Whereas, unidirectional causality runs from short term interest rate to stock prices. Sensitivity analysis confirms that the results are robust. It is suggested that investors should invest in banking sector stocks when exchange rate and interest rates are highly volatile. The result also supports the view that exchange rate and interest rate can be used as an indicator for investment decision making in banking sector stocks.

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Bibliographic Info

Article provided by Asociatia Generala a Economistilor din Romania - AGER in its journal Theoretical and Applied Economics.

Volume (Year): XVIII(2012) (2012)
Issue (Month): 8(573) (August)
Pages: 153-166

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Handle: RePEc:agr:journl:v:8(573):y:2012:i:8(573):p:153-166

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Keywords: interest rate; exchange rate; GARCH; cointegration.;

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