The Impact of Macroeconomic Variables on Stock Prices: A Case Study of Karachi Stock Exchange

Abstract

Investment decisions are highly influenced by macroeconomic variables as changes in macroeconomic variables effect stock markets differently according to the country economic conditions and government policies. The study contributes by determining the effect of various macroeconomic variables on stock prices of Pakistan by analyzing the monthly data from May 2000 - August 2016. As all the variables are stationary at first difference thus ideal ARDL approach of bound testing is applied to check the short term and long term cointegration of the macroeconomic variables on stock prices. The findings suggest that stock prices of Karachi Stock Exchange in long term are significantly affected by money supply, exchange rate, and interest rate. In short term all the variables are insignificant except exchange rate which is negatively cointegrated with stock prices. The central bank shall be vigilant while changing the money supply in market because too much increase in money supply could effect investment as well as stock market. The regulator should keep interest rate relatively low to encourage economic activities, improve external economic environment through rule based exchange rate policy and avoid discretionary measures.

Keywords: Karachi Stock Exchange, Macroeconomic variables, Time series analysis, KSE-100 index, Cointegration, ARDL, Bound testing approach.