Impact of Financial and Macroeconomic Variables on Stock Market: A Case from Pakistan

Abstract

The research evaluates the relationship and impact of Financial and Macroeconomic Variables on Stock Market Returns. The researchers evaluate the relationship and impact of various factors includes the Exchange rates, Inflation, Interest rates, Industrial Production, exports, worker remittances and finds different relationship in various economies based on market conditions and demand and supply factors. This Quantitative research conducted in Post Positivism Paradigm adopting the theoretical framework of Mishkin monetary policy mechanisms. The research selected the four major variables includes the Inflation, Treasury Bills 6 months rates, Exchange rates and Industrial Production to evaluate the impact of Stock Market returns. The PSX-100 index chosen as proxy of measuring the stock market return and 10 yearly month data from June-2008 to July-2018 taken to evaluate the relationship. The Correlation Analysis shows the negative relationship of Inflation, Interest rates and Exchange and positive relationship of Industrial Production with stock market returns. The Co-integration analysis that Interest rates, Exchange rates, Inflation and Industrial Production having long term relationship and evaluate the relationship and impact with stock market returns in Pakistan. The research is useful for the investor to evaluate the risk and return relationship while investing in stock market returns and research also useful for researcher to evaluate the variables and further research on relevant areas. The numerous tests applied to quantify the relationship and impact of macroeconomic variables on stock market returns. This research observed that macroeconomic variables co-integrated with prices of stock market. A decrease in exchange rate positively co-related with higher inflation in future, and that make investors doubtful of the company’s future performance and as outcome Stock prices begin to decline.