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Macroeconomic Factors and Pakistani Equity Market

Author

Listed:
  • Mohammed Nishat

    (Institute of Business Administration, Karachi.)

  • Rozina Shaheen

    (Institute of Business Administration, Korangi Creek, Karachi.)

Abstract

This paper analyzes long-term equilibrium relationships between a group of macroeconomic variables and the Karachi Stock Exchange Index. The macroeconomic variables are represented by the industrial production index, the consumer price index, M1, and the value of an investment earning the money market rate. We employ a vector error correction model to explore such relationships during 1973:1 to 2004:4. We found that these five variables are cointegrated and two long-term equilibrium relationships exist among these variables. Our results indicated a "causal" relationship between the stock market and the economy. Analysis of our results indicates that industrial production is the largest positive determinant of Pakistani stock prices, while inflation is the largest negative determinant of stock prices in Pakistan. We found that while macroeconomic variables Granger-caused stock price movements, the reverse causality was observed in case of industrial production and stock prices. Furthermore, we found that statistically significant lag lengths between fluctuations in the stock market and changes in the real economy are relatively short.

Suggested Citation

  • Mohammed Nishat & Rozina Shaheen, 2004. "Macroeconomic Factors and Pakistani Equity Market," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 619-637.
    • Handle: RePEc:pid:journl:v:43:y:2004:i:4:p:619-637
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Market; Pakistan; Stock Market;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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