Time Series Analysis of the Relationship between Macroeconomic Factors and the Stock Market Returns in Pakistan

Authors : Zaheer ALAM, Kashif RASHID

Pages : 6361-6370

Doi:10.19168/jyu.55431

View : 78 | Download : 7

Publication Date : 2015-01-26

Article Type : Conference Paper

Abstract :The purpose of this research is to investigate the relationship between Karachi stock market 100 index and macroeconomic variables, i.e., inflation, industrial production, money supply, exchange rate and interest rate. The long term relationship between macroeconomic variables and stock market returns has been analyzed by using Johnson Cointegration test, Augmented Dicky Fuller insert ignore into journalissuearticles values(ADF); and Phillip Perron insert ignore into journalissuearticles values(PP); tests. The Autoregressive Conditional heteroskedasticity Lagrange Multiplier insert ignore into journalissuearticles values(ARCH LM); test provided prudent evidence about the presence of heteroskedasticity in the data. The Generalized Autoregressive Conditional heteroskedasticity insert ignore into journalissuearticles values(GARCH); model was used to find out the relationship between stock returns and the variance of the squared error terms as there was heteroskedastic trend in the data. The results show that the cointegrating relationship exists between stock prices and the macroeconomic variables in Pakistani stock market. The GARCH model showed the significant relationships after mitigating the heteroskedasticity. The consumer price index insert ignore into journalissuearticles values(CPI);, money supply insert ignore into journalissuearticles values(MS);, exchange rates insert ignore into journalissuearticles values(ER); and interest rates insert ignore into journalissuearticles values(IR); proved to be negatively associated with the stock returns insert ignore into journalissuearticles values(SR);, while industrial production index insert ignore into journalissuearticles values(IPI); was found to be positively associated with the stock returns. All the variables were significantly associated to stock market returns except inflation. The investors can use the GARCH results for investment decisions that is the returns are volatile not only due to any happening today but also on the past. The findings suggest that in the long run, the Pakistani stock market is reactive to macroeconomic indicators.
Keywords : Stock markets, Pakistan, Macroeconomics and heteroskedasticity

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