The Impact of Macroeconomic Variables on Stock Prices: An Empirical Analysis of Islamabad Stock Exchange
DOI:
https://doi.org/10.1956/jge.v10i2.346Keywords:
4567Abstract
The purpose of this study was to analyze long-run causal relationship between ISE (Islamabad Stock Exchange) and macroeconomic variables in Pakistan and also find out the direction of causality. The impact of macroeconomic variables on stock prices of ISE has not been previously discussed by the researchers. The monthly data from January 2001 to December 2010 was used in this study. The set of macroeconomic variables include Exchange Rate (ER), Foreign Exchange Reserves (FER), Industrial Production Index (IPI), Interest Rate (IR), Imports (M), Money Supply (MS), Wholesale Price Index (WPI) and Exports (X). Descriptive statistics and Unit root test, Johansen Co-integration Technique and Granger Causality Technique were employed to analyze the long-run and causal relationship between the macroeconomic variables and stock prices.
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 The results revealed that M showed positive and significant relationship but Foreign Exchange Reserves (FER) and Industrial Production Index (IPI) indicated positive and insignificant relationship with the stock prices. Exchange rate(ER), Money supply (MS) and  Whole sale price index(WPI) showed negative but significant relationship while Interest  rate (IR) and Export( X )indicated a negative and insignificant relationship with the stock prices. The findings of Granger Causality revealed that only exports showed a unidirectional causal relationship.
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References
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2. Ali, M.B., (2011). Impact of Micro and Macroeconomic Variables on Emerging Stock Market Return: A Case on Dhaka Stock Exchange (DSE). Interdisciplinary Journal of Research in Business, 1(5), 08-16.
3. Asaolu, T.O., and Ogunmuyiwa, M.S. (2011). An Econometric Analysis of the Impact of Macroeconomic Variables on Stock Market Movement in Nigeria. Asian Journal of Business Management, 3(1), 72-78.
4. Chang, Y., Yeung, C., & Yip, C. (2000). Analysis of the Influence of Economic Indicators on Stock Prices using Multiple Regression. Exchange Organizational Behavior Teaching Journal.
5. Erdogan, E., & Ozlale, U. (2005). Effects of Macroeconomic Dynamics on Stock Return: The Case of the Turkish Stock Exchange Market. Journal of Economic Corporation, 26(2), 69-90. Retrieved from: http://www.sesric.org/jecd/jecd_ articles /ART05010102-2.pdf, Retrieved dated: 16th June 2011.
6. Garcia, J.G.G., & Yue, Y. (2010). International Determinants of Stock Market Performance in China: A Co-integration Approach. Centre for Global Finance Bristol Business School University of the West of England Coldharbour Lane.
7. Gan, C., Lee, M., Yong, H.H.A., and Zhang, J. (2006). Macroeconomic Variables and Stock Market Interactions: New Zealand Evidence. Investment Management and Financial Innovations, 3(4), 89-101.
8. Gay-Jr, R.D. (2008), Effect of Macroeconomic Variables on Stock Returns for Four Emerging Economics: Brazil, Russia, India and China. International Business & Economics Research Journal, 7(3), 1-8.
9. Hasan, A., and Nasir, D.Z.M. (2008). Macroeconomic Factors and Equity Prices: An Empirical Investigation by Using ARDL Approach. The Pakistan Development Review, 47(4), 501-513.
10. Humpe, A., & Machmillan, P. (2009). Can macroeconomic variables explain long-term stock market movements? A comparison of the US and Japan. Applied Financial Economics, 19(2), 111-119. doi: 10.1080/09603100701748956
11. Ihsan, H., Ahmad, E., Haq, M.I.U., and Sadia, H. (2007). Relationship of Economic and Financial Variables with Behaviors of Stock Returns. Journal of Economic Corporation, 28(2), 1-24.
12. Kumar, A. (2011). An Empirical Analysis of Causal Relationship between Stock Market and Macroeconomic Variables in India. International Journal of Computer Science & Management Studies (IJCSMS), 11(1), 8-14. Retrieved from: http://ijcsms.com/journals/Paper2.pdf, Retrieved dated: 28th June 2011.
13. Lijuan, W., & Ye, X. (2010). Empirical Analysis of Macroeconomic Factors Affecting the Stock Price. Orient Academic Forum.
14. Mohamed, A., Wisam, R., Aris, H., and Md, F. (2009). Effects of Macroeconomic Variables on Stock Prices in Malaysia: An Approach of Error Correction Model. Munich Personal RePEc Archive, from University Library of Munich, Germany, web site: http://mpra.ub.uni-muenchen.de/20970/, Retrieved dated: 16th June 2011.
15. Mohammad, S.D., Hussain, A., Jalil, M.A., and Ali, A. (2009). Impact of Macroeconomics Variables on Stock Prices: Empirical Evidence in Case of KSE (Karachi Stock Exchange). European Journal of Scientific Research, 38(1), 96-103.
16. Nath, G.C., & Samanta, G.P. (2003). Relationship between Exchange Rate and Stock Prices in India - An Empirical Analysis. Social science electronic publishing, Inc.
17. Nishat, D.M., and Shaheen, R. (2004).Macroeconomic Factors and Pakistan Equity Market. The Pakistan Development Review, 43(4), 619-637. Retrieved from: http://www.pide.org.pk/pdf/PDR /2004/4 /Part II /M%20Nishat.pdf, Retrieved dated: 7th September 2011.
18. Pilinkus, D. (2009). Stock Market and Macroeconomic Variables: Evidences from Lithuania. Economics & Management, 14, 884-891.
19. Qayyum, A., and Anwar, S. (2011). Impact of Monetary Policy on the Volatility of Stock Market in Pakistan. International Journal of Business and Social Science, 2(11) 18-24.
20. Rizwan, M.F., and Khan, S.U. (2007). Stock Return Volatility in Emerging Equity Market (KSE): The Relative Effects of Country and Global Factors. International Review of Business Research Papers, 3(2), 362-375.
21. Sharkas, A., and Adel. (2004).The Dynamic Relationship between Macroeconomic Factors and the Jordanian Stock Market. International Journal of Applied Econometrics and Quantitative Studies, 1(1), 97-114.
22. Sharma, G.D., & Mahendru, M. (2010). Impact of Macro-Economic Variables on Stock Prices in India. Global Journal of Management and Business Research, 10(7), 19-26.
23. Singh, D. (2010). Causal Relationship between Macro-Economic Variables and Stock Market: A Case Study for India. Pakistan Journal of Social Sciences (PJSS), 30(2), 263-274.
24. Singh, T., Mehta, S., & Varsha, M.S. (2011). Macroeconomic factor and stock returns: Evidence from Taiwan. Journal of Economics and International Finance, 2(4), 217-227.
25. Sohail, N., and Hussain, Z. (2009). Long-Run and Short-Run Relationship between Macroeconomic Variables and Stock Prices in Pakistan: The Case of Lahore Stock Exchange. Pakistan Economic and Social Review, 47(2), 183-198.
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Published
02.07.2014
How to Cite
Rasool, N. and Hussain, M. M. (2014) “The Impact of Macroeconomic Variables on Stock Prices: An Empirical Analysis of Islamabad Stock Exchange”, Journal of Global Economy, 10(2), pp. 73–93. doi: 10.1956/jge.v10i2.346.
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