Effects of Interest Rate and Exchange Rate on the Stock Market Performance of Pakistan: A Cointegration Approach

Abstract

This research paper is an endeavor to empirically investigate the economic effects of interest rates and exchange rates on stock market capitalization by considering annual data for Pakistan covering the 1990-2017 periods. The main intention of this research is to analyze the short-run together with the long-run interconnections between the aggregate market capitalization and macroeconomic variables by employing the econometric tools of Johansen approach, Error Correction Model (ECM) and then inspection of Variance Decomposition. And finally, causal linkages have been explored by the application of Granger-Causality test. By applying the Johansen Jeselius approach, it is detected that the whole series of data are co-integrated showing the long-term relationships among the examined variables. The long-term coefficient shows that a 1% increase in interest rate and in exchange rate contributes 0.23% decrease and 3.17% increase in market capitalization, respectively. The estimated ECM lagged value illustrates that in the short period, 22.07% volatility of market capitalization are corrected per annum to reach at the steady-state. And the analysis of Granger-causality tool reports the existence of a unidirectional causality from foreign exchange rate to interest rate. The further reduction of bank rate in the economy has been recommended in this study to facilitate the financial sector development as well as to stimulate the investment level both nationally and internationally.

Systematic risk and performance of stock market in Kenya

“…Given that the p-value was greater than 0.05 significance for the residual, we failed to reject the null hypothesis and thus the conclusion that the residuals are normally distributed 91 Treasury Bill Rate and NSE 20 share Index Johansen Normalized Results The results of Johansen normalized shows that changes in 91 Treasury bill rate are positively related with changes in NSE 20 share Index. This finding is consisted with findings of Kuwomu (2012) but contracted (Khalid, 2017).…”

“…Empirical evidence across the world indicates contradicting results in regard to factors affecting the stock performance. Khalid (2017) studied the relationship between interest rates and stock markets, by focusing on the longrun relationships between short term interest rates and found a positive long run relationship between interest rates and stock prices. Nguyen ( 2016) found a negative relationship, between interest rates and stock prices.…”

The Relationship Between Unemployment and Economic Growth in South Africa: VAR Analysis

“…If there exists more than one co-integrating relationship in the case when we have more than two variables in the model, we can't apply the Engle-Granger (1987) approach of co-integration (Asteriou and Hall, 2007). The ADF test reports that the variables are I (1); hence, the suitable co-integration approach is the Johansen and Juselius methodology (1990) (see, Khalid, 2017;Khalid and Khan, 2017). In our analysis, the findings report that the trace statistic value is less than the 5% critical value; consequently, the model suggests no co-integrating relationship between two variables.…”

Tracing Return and Volatility Spillover Effect between Exchange Rate and Pakistan Stock Exchange Index

“…They found bidirectional mean and volatility spillover effect between the financial series. Khalid (2017) anticipated the effect of macroeconomic variables interest rate, exchange rate on stock market KSE 100 index. He used KSE 100 index and macroeconomic variables data from the period of 1990 to 2017, used Granger causality test, Error Correction Mechanism (ECM) model and Johanson cointegration procedure.…”