Macroeconomic Indicators and Stock Market Development

Abstract

The stock markets play a key role in both developing and advanced countries because it channelize idle money into productive investment and generate capital for businesses which boosts the economy up. Pakistan’s stock market is an emerging stock market. The main objective of the study is to check the contribution of macroeconomic indicator to the stock market development. In this study, an attempt is made to capture the macroeconomic determinants that effect more or less in stock market development. Karachi Stock Exchange (KSE) is taken as a representative stock exchange of Pakistan. This study considered Gross Domestic Saving (GDS), Money Supply (MS) and Foreign Remittances (FR) as explanatory variables and stock market development (SMD) takes as dependent variable. The study employed Phillips and Perron (PP) test for Stationarity. Finally the study utilized the ARDL to co-integration approach because it is more dominant and robust procedure to examine the short run and long run dynamic relationship. Autoregressive distributed lag (ARDL) and Error Correction Model used to find the relationship between the variables of selected econometric model. The ARDL to Co-integration results  showed that Gross domestic savings ,money supply positively contribute to the development of stock market in Pakistan in both short run and long run that are consistent with theoretical and conceptual framework and literature (See also; Raza et al., 2012; Adam and Tweneboah, 2009). Foreign remittances have insignificant effect in both short run and long run on stock market because most of the foreign remittances are used in consumption. CUSUM lines remained inside the critical bound at 5 percent significance level that guaranteed the stability of  model.

Keywords: Stock Market development, Money Supply, Gross Domestic Saving, Foreign Remittances