Short Run and Long Run Dynamics of Macroeconomics Variables and Stock Prices: Case Study of KSE (Karachi Stock Exchange)

Kashmir Economic Review, Vol. XVIII, Nos. 1 & 2, January-December, 2009

19 Pages Posted: 6 Apr 2012

See all articles by Adnan Hussain

Adnan Hussain

Benazir Bhutto Shaheed University, Lyari, Karachi; University of Karachi - Applied Economics Research Centre

Irfan Lal

Institute of Business Management (IoBM); University of Karachi - Applied Economics Research Centre; Institute of Business Management

Muhammad Mubeen

Bilkent University, Department of Management, Students; IQRA University - IQRA University (Gulshan Campus)

Date Written: November 6, 2009

Abstract

The prime object of the study is to find the long run relationship between macroeconomic variables and prices of shares in Karachi stock exchange in Pakistan context. For this purpose the study considers the monthly data of several macroeconomic variables such as real foreign exchange rate, foreign exchange reserve, industrial production index, whole sale price index, gross fixed capital formation, and broad money M2 , these variables are obtain from 1987 to 2008 period. For the purpose of finding long run relationship among the variables Johansen co-integration test is applied. The results show that after the reforms in 1991 the influence of foreign exchanges rate and foreign exchange reserve effects significantly to stock market. The result also shows that there was positive relationship between GFCF and M2 while WPI is negative relationship with stock price. The result also highlighted that interest rate is insignificant with stock prices in the long run. The VECM analysis illustrated that the coefficients of ecm1 (–1), and ecm2 (–1) were significant with negative signs. The coefficients of both error correction terms showed high speed of adjustment. The results of variance decompositions revealed that out of seven macroeconomic variables inflation showed greater forecast error for KSE 100 Index.

Keywords: Stock prices, Macroeconomics variables

JEL Classification: G12, E20

Suggested Citation

Hussain, Adnan and Lal, Irfan and Mubeen, Muhammad, Short Run and Long Run Dynamics of Macroeconomics Variables and Stock Prices: Case Study of KSE (Karachi Stock Exchange) (November 6, 2009). Kashmir Economic Review, Vol. XVIII, Nos. 1 & 2, January-December, 2009, Available at SSRN: https://ssrn.com/abstract=2035207

Adnan Hussain

Benazir Bhutto Shaheed University, Lyari, Karachi ( email )

Faqir Mohammad Dura Khan Road,
Near cheel chowk
Karachi, Sindh 75500
Pakistan

HOME PAGE: http://www.bbsul.edu.pk

University of Karachi - Applied Economics Research Centre ( email )

Mail University Road
Karachi University
Karachi, SC Sind 75270
Pakistan

Irfan Lal (Contact Author)

Institute of Business Management (IoBM) ( email )

Plot # 84
Korangi Creek
Karachi, Sindh 75190
Pakistan

University of Karachi - Applied Economics Research Centre ( email )

Main University Road
Karachi University
Karachi, SC Sindh 75270
Pakistan
00923212348843 (Phone)

Institute of Business Management ( email )

D-93040 Regensburg
Germany

Muhammad Mubeen

Bilkent University, Department of Management, Students ( email )

Ankara
Turkey

IQRA University - IQRA University (Gulshan Campus) ( email )

Abid Town, Block-2, Gulshan-e-Iqbal
Karachi, Sindh 75300
Pakistan

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