Macroeconomic Factors and Sectoral Indices: A Study of Karachi Stock Exchange (Pakistan)

Abstract

The primary purpose of this study is to examine the impact of macroeconomic variables on stock returns by applying multifactor model within an APT frame work. This study consists of five macroeconomic variables Money Supply, Exchange Rate, Industrial Production, Short Term Interest Rate and Oil prices. Nine sectors are selected for the study on the basis of data availability on the Karachi Stock Exchange 100 index. These sectors are Oil and Gas, Textile Composite, Jute, Cement, Cable and electrical Goods, Automobile, Chemical and Pharmaceutical, Leasing and Glass and Ceramics. The closing prices of each firm of each sector are obtained for the period of ten years starting from June 2000- June 2010. Descriptive statistics are performed for the temporal properties of data and Augmented Dickey Fuller (ADF) is employed to check the stationarity of data.  Multicollinearity has been tested among independent variables through correlation matrix. Diagnostic results show that data has no econometric problem therefore Ordinary Least Square has been used to analyze the impact of macroeconomic variables on the returns. The result reveals that macro-economic variables have significant impact on the returns of sectors but their contribution to bring variation in their returns is very small. Only Short Term Interest Rate has a significant impact on returns of various sectors where as Exchange Rate and Oil prices have significant impact on specific sectors like and Oil and Gas sector, Automobile and Cable and Electronics. This sectoral study also documents the usefulness of the multifactor model as compared to a single index model.

Key Words: Arbitrage Pricing Theory (APT), Ordinary Least Square (OLS), Augmented Dickey Fuller Test (ADF), Macroeconomic Variables, Sectoral Indices.