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Dynamic analysis of the relationship between stock prices and macroeconomic variables: An empirical study of Pakistan stock exchange

Bisharat Hussain Chang (Department of Management Sciences, SZABIST Larkana, Larkana, Pakistan)
Muhammad Saeed Meo (Department of Management Sciences, The Superior College Lahore, Lahore, Pakistan)
Qasim Raza Syed (Department of Management Sciences, SZABIST Larkana, Larkana, Pakistan)
Zahida Abro (Department of Management Sciences, SZABIST Larkana, Larkana, Pakistan)

South Asian Journal of Business Studies

ISSN: 2398-628X

Article publication date: 19 September 2019

Issue publication date: 4 November 2019

458

Abstract

Purpose

The purpose of this paper is of twofold: first, to empirically examine the short-run and long-run impact of macroeconomic variables such as industrial production, foreign direct investment (FDI), trade balance (TB), exchange rate, interest rate (IR) and consumer price index (CPI) on stock prices (SP) of KSE-100 index; and second, to examine whether this relationship changes as a result of the financial crisis.

Design/methodology/approach

This study uses an autoregressive distributed lag model by using the full sample period data from 1997Q3 to 2018Q2 and the post-crisis period data from 2008Q3 to 2018Q2. Moreover, it uses variance decomposition analysis to examine the importance of each variable in explaining SP.

Findings

The findings of the full sample period indicate that in the long run, TB, exchange rate and IR negatively affect SP whereas CPI and industrial production positively affect SP. However, the post-crisis period data indicate that only CPI positively affects the SP in the long run. Finally, variance decomposition analysis indicates 30 percent variance in SP is explained by its own shock.

Practical implications

The study findings suggest that macroeconomic variables have a significant role and can be considered important for taking investment and/or policy decisions. Especially, Governments and other regulators may need to take measures to increase the TB since it can help to increase the performance of the Pakistani stock market. Furthermore, investors may consider that findings change when the financial crisis has been taken into consideration.

Originality/value

This study uses two additional variables, namely FDI and TB by using the robust technique in the context of emerging countries like Pakistan. Furthermore, it takes into account the impact of the financial crisis on the underlying variables.

Keywords

Citation

Chang, B.H., Meo, M.S., Syed, Q.R. and Abro, Z. (2019), "Dynamic analysis of the relationship between stock prices and macroeconomic variables: An empirical study of Pakistan stock exchange", South Asian Journal of Business Studies, Vol. 8 No. 3, pp. 229-245. https://doi.org/10.1108/SAJBS-06-2018-0062

Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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