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Causality between Macroeconomic Indicators and Stock Market: An Econometric Analysis

Author

Listed:
  • Akbar, Muhammad Imad ud Din

    (National University of Modern Languages Pakistan)

  • Butt, Abdul Rauf

    (University of Punjab, Pakistan)

  • Chaudhry, Ali Farhan

    (Ryerson University Canada)

Abstract

We attempt to examine the causality between economic growth and stock market performance of Pakistan for the years 1992M01-2012M12. For this purpose, the test devised by Granger (1988) has been employed. The results reveal a bi-directional causality between economic growth and stock market performance of Pakistan proxied by Karachi Stock Exchange capitalization (KSECAP). Once this bidirectional causality is established, a system of simultaneous equations has been specified and estimated by 2SLS to find the impact of economic growth and selected macroeconomic indicators on the stock market of Pakistan. The estimated results lead to the conclusion that economic growth affects the stock market of Pakistan and vice versa. The implications of the study are of paramount importance, especially for the emerging economies. Hence, bearing in mind the role of macroeconomic indicators in the performance of stock market a better policy can be formulated to enhance the growth of capital markets that in turn will increase the economic growth of emerging economies such as Pakistan and vice versa.

Suggested Citation

  • Akbar, Muhammad Imad ud Din & Butt, Abdul Rauf & Chaudhry, Ali Farhan, 2021. "Causality between Macroeconomic Indicators and Stock Market: An Econometric Analysis," Empirical Economic Review, Department of Economics and Statistics, Dr Hassan Murad School of Management, University of Management and Technology, Lahore, vol. 4(1), pages 137-155.
    • Handle: RePEc:ris:empecr:0036
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    Cited by:

    1. Jisha S. Kumar & J. S. Bhagavathi, 2023. "COVID-19 and Coping Strategies: A Study Among the Salaried Employees in Kerala," Jindal Journal of Business Research, , vol. 12(1), pages 85-95, June.

    More about this item

    Keywords

    KSE; Granger Causality; 2SLS;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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