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Macroeconomic Factors and Equity Prices: An Empirical Investigation by Using ARDL Approach

Author

Listed:
  • Arshad Hasan

    (Muhammad Ali Jinnah University, Islamabad.)

  • Zafar Mueen Nasir

    (Pakistan institute of Development Economics, Islamabad.)

Abstract

This study examines the relationship between equity prices and macroeconomic variables such as inflation, industrial production, oil prices, short term interest rate, exchange rates, foreign portfolio investment, and money supply for the period 6/98 to 6/2008 by employing bounds testing procedure proposed by Pesaran, et al. (2001). Autoregressive distributed lag (ARDL) approach has been applied as yields consistent estimates of the long-run coefficients that are asymptotically normal irrespective of whether the underlying regressors are I(0) or I(1). Data has been tested for econometric problems like serial correlation, functional form, normality, heteroscdisticity and unit root by using LM test, Ramsey Reset test, skewness and kurtosis test, white test and ADF Test, and Phillip Parren Test respectively but no problem has been observed. Results of the study reveal that industrial production, oil prices and inflation are not statistically significant in determining equity prices in long run while interest rates, exchange rates and money supply have significant long run effect on equity prices. The error correction model (ECM) based upon ARDL approach confirms that changes in industrial production, oil prices and inflation are not statistically significantly in short run while changes in interest rates, exchange rates, and money supply have significant short term effect. However, foreign portfolio investment has significant short term effect but no long term effect. The tests suggest that adjustment process is quite fast and model is structurally stable . This study facilitates the investors in taking effective investment decisions by estimating the future direction of equity prices using expected trends in exchange rates, money supply and interest rate. Similarly, study suggest to the architects of monetary policy to be careful in revision of interest rates as capital market responds negatively to such decisions. The study also suggest that macroeconomic policies should be designed keeping in view the response of the capital market because efficient market hypothesis indicates that capital markets respond to new information.

Suggested Citation

  • Arshad Hasan & Zafar Mueen Nasir, 2008. "Macroeconomic Factors and Equity Prices: An Empirical Investigation by Using ARDL Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 501-513.
    • Handle: RePEc:pid:journl:v:47:y:2008:i:4:p:501-513
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    Citations

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    Cited by:

    1. Dr. Abubakar El-Sidig Ali A Mahdi, 2023. "Association among Omani Gross Capital Formation, Final Consumption Expenditure, Exports, and Imports," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 10(12), pages 53-63, December.
    2. Muhammad Murtaza & Muhammad Ayyoub & Aisha Riaz & Riaz Ahmed, 2023. "Examining Linkages between Poverty Alleviation and Macroeconomic Performance in Pakistan," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 9(2), pages 665-678.
    3. Konrad Farrugia & Janice Duca & Peter J. Baldacchino & Simon Grima, 2021. "The Relationship between Inflation and Stock Returns in a Small Island State: An Analysis," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 11(2), pages 51-78.
    4. Adnan Javed & Muhammad Rafiq & Sarfaraz Khan & Muhammad Mohsin Khan, 2011. "The Impact Of Macroeconomic Variables On Stock Market: Empirical Evidence On Karachi Stock Exchange By Using ARDL Model," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 3(2), pages 125-142, October.
    5. Altaf Hussain & Musrat Rafique & Ambar Khalil & Maryam Nawaz, 2013. "Macroeconomic Determinants Of Stock Price Variations: An Economic Analysis Of Kse-100 Index," Pakistan Journal of Humanities and Social Sciences, International Research Alliance for Sustainable Development (iRASD), vol. 1(1), pages 28-46, June.
    6. Ghozali Maski & An'im Kafabih & Arif Hoetoro, 2018. "Testing Profit and Loss Sharing to Stabilise Level of Inflation: Evidence From Indonesia," Research in World Economy, Research in World Economy, Sciedu Press, vol. 9(2), pages 12-23, June.
    7. Safet KURTOVIC & Blerim HALILI & Nehat MAXHUNI, 2017. "Bosnia and Herzegovina vs. Her Trading Partner from Southeast Europe," Turkish Economic Review, KSP Journals, vol. 4(1), pages 75-85, March.
    8. Sevinç Güler & Halime Temel Nalın, 2014. "The Determinants of Stock Market Returns: An ARDL Investigation on Borsa Istanbul," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(51), pages 3-24, March.
    9. Rana Ejaz Ali Khan & Rafaquat Ali, 2015. "Causality Analysis of Volatility in Exchange Rate and Stock Market Prices: A Case Study of Pakistan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(5), pages 805-815, May.
    10. Naurin, Abida & Qayyum, Abdul, 2016. "Impact of Oil Price and Its Volatility on Stock Market Index in Pakistan: Bivariate EGARCH Model," MPRA Paper 70636, University Library of Munich, Germany.
    11. Hussain, Anwar Hussain, 2012. "Impact of Credit Disbursement, Area under Cultivation, Fertilizer Consumption and Water Availability on Rice Production in Pakistan (1988-2010)," MPRA Paper 41963, University Library of Munich, Germany.

    More about this item

    Keywords

    Macroeconomic Variables; Multifactor Model; Pakistan; ARDL; Error Correction Model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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