Macroeconomic Variables and Stock Market Performance: Testing for Dynamic Linkages with a Known Structural Break
AbstractThis paper investigates the dynamic interactions between four macroeconomic variables and stock prices in Pakistan, using cointegration and Granger causality tests that are robust to structural breaks. The results strongly suggest cointegration between the stock prices and macroeconomic variables viz. consumer prices, industrial production, exchange rate and the market rate of interest. Estimates of bivariate error-correction models reveal that there is long-run bidirectional causation between the stock prices and all the said macroeconomic variables with the exception of consumer prices that only lead to stock prices. The results also provide some evidence that the stock prices Granger-caused by changes in interest rates in the short run. However, the analysis is unable to explore any short-run causation between the stock prices and the remaining three macroeconomic variables. It may therefore be stated that the association between the health of the stock market in the sense of a rising share prices and the health of the economy is only a long-run phenomenon.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 26937.
Date of creation: 15 Jan 2008
Date of revision:
Publication status: Published in Saving and Development XXXII.1(2008): pp. 77-102
Stock Returns; Exchange Rates; Interest Rates; Industrial Output; Prices; Economic Activity; Structural Breaks; Additive-Outlier Model;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
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