Effects of Macroeconomic Variables on the Stock Market Volatility: The Pakistan Experience

Abstract

This research paper empirically investigates the effects of interest rates, exchange rates and inflation rates on stock market performance of Pakistan by using annual time series data covering the 1991-2017 periods. The prime intention of this research was to inspect the long-run and short-run relationships between the KSE-100 index and macroeconomic variables by employing the econometric techniques of Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and the Error Correction Model (ECM), respectively. By applying the ARDL model, the empirical results revealed the fact that there was a negative and significant impact of interest rate on the market index, whereas; the exchange rate and the inflation rate have a positive impact on stock market volatility in the long-run. Furthermore, the ECM analysis pointed out that an estimated coefficient of the error correction term was significant with expected negative sign and showed that 46.53% deviation of the stock market index are corrected in the short-run per year. The study recommended that the monetary authorities should further reduce the bank rate up to the lowest rate in order to stimulate the stock market performance, which in turn; will boost the existing investment level and will encourage the new investment into the stock market. In addition, this policy will also ensure in the reduction of higher inflation rates. And the study found that the reduction in bank rate and stabilization in exchange rate is essential to local and foreign investors in the short-run.

Evaluation of the Impact of Macroeconomic Variables on Stock Market Performance in Nigeria

“…This result is in agreement with the findings of (Talla 2013;Gatsimbazi et al, 2018) while disagreeing with the findings of (Ouma & Muriu, 2014;Giri & Joshi, 2017) whose studies revealed the inflation rate had significant positive impact on share prices. The result also conflicts with the findings of (Barno, 2014;Golam et al, 2017;Khalid & Khan, 2017) whose studies did not find inflation rate influencing share prices.…”

“…Thus, Ho1 is accepted and the alternative suggestion which states otherwise rejected. However, this finding is not consistent with the findings of (Khodaparasti, 2014;Nijam, et al, 2015;Giri & Joshi, 2017;Golam et al, 2017;Khalid & Khan, 2017;Epaphra & Salema, 2018;Megaravalli & Sampagnaro, 2018) who found in their studies that exchange rate significantly and positively influenced stock market performance. The result also contradicts the findings of Khan and Khan (2018) whose study revealed that exchange rate influenced stock prices of Karachi Stock Exchange in Pakistan significantly and negatively in the short run.…”

“…The study found evidence that exchange rate, interest rate and foreign currency reserve were all statistically significant in influencing stock market performance of the SAARC countries while inflation and money supply did not exert significant influence on the stock market returns. Khalid and Khan (2017) investigated the effects of interest rates, exchange rates and inflation rates on stock market performance in Pakistan from 1991 to 2017 using ARDL bounds and Error Correction Model (ECM). The findings revealed that interest rate had a significant negative impact on stock market while exchange rate and inflation rate exerted positive influence on stock market index.…”

The Impact of Macroeconomic Variables on Stock Prices in Kuwait

“…Our result is consistent with other studies that find a positive relationship between inflation and stock prices, for example: Choudhry (2001), Karagoz, Ergun and Karagoz (2009), Al-Shami and Ibrahim (2013), Olufisayo (2013), Ahmed, Islam and Khan (2015) and Ndunda, Kingori and Ariemba (2016). However, opposing results were found in other studies, which find a negative relationship between these two variables, such as Fama (1981Fama ( , 1990, Spyrou (2001), Sohail and Hussain (2009) and Saleem, Zafar, and Rafique (2013). It is worth mentioning that all of the relationships are unidirectional, from the macroeconomic variables to the KSE.…”

Macroeconomic factors and LQ45 stock price index: evidence from Indonesia

“…Similarly, several macroeconomic variables, including money supply, exchange rates, and inflation, affect the stocks market return in Kenya (Mumo, 2017). Indeed, Khalid and Khan (2017) showed that the exchange rate and inflation positively affect stock market volatility in the long run. In contrast, Rad (2011) mentioned that macroeconomic variables such as consumer price index, free-market exchange rates do not play an important role in fluctuating stock prices in Iran.…”