How Does Stock Prices Respond to Various Macroeconomic Factors? A Case Study of Pakistan
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Published:
2024-04-11
Keywords:
stock market prices, macroeconomic factors, ARDL technique
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Abstract
Over the time everything flourished, at the same token the interrelationship among the stock market prices, returns and macroeconomic factors got attendance of the researchers in the field of finance and economics around the world. In this respect current study is an attempt to investigate the response of various macroeconomic factors (GDP, Money Supply, inflation, exchange rate and Size of firm) toward stock market prices in case of Karachi stock exchange over a period of 1971 to 2012. The study utilizes Autoregressive Distributed lag model (ARDL) technique. The results shows that in long run each factor significantly contribute to the stock price while in shot run some factors were significant while some were not but the error correction term shows significant convergence toward equilibrium. The findings of study suggest that for smoothness of stock market the current factors must be targeted.
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How Does Stock Prices Respond to Various Macroeconomic Factors? A Case Study of Pakistan. (2024). Journal of Management Info, 1(4), 25-30. https://doi.org/10.31580/jmi.v4i1.22
References
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Bailey, W., and Y. P. Chung, 1995, Exchange rate fluctuations, political risk, and stock returns: Some evidence from an emerging market, Journal of Financial and Quantitative Analysis 30, 541-561.
Bilson, Christopher M., Timothy J. Brailsford and Vincent J. Hooper, (2001), “Selecting Macroeconomic Variables as Explanatory Factors of emerging Stock Market Returnsâ€, Pacific-Basin Finance Journal, Vol.9 pp. 401-426.
Branson, W. H. (1983). Macroeconomic determinants of real exchange rate, Cambridge University Press, Cambridge, MA.
Black, A., P. Fraser and R. MacDonald, “Business Conditions and Speculative Assetsâ€, Manchester School, 1997, 4, 379-393.
Campbell, J. Y. and R. Shiller (1988), Stock prices, earnings and expected dividends, Journal of Finance, 43, 661-676.
Charemza,W.W. – Deadman, D.F. (1992), New Directions in Econometric Practice: General to Specific Modeling, Cointegration, Aldershot: Edward Elgar.
Chen N.F. Financial Investment Opportunities and the Macro economy, Journal of Finance, 1991, Vol. 16, No. 2, pp. 529-553.
Chen, N. F., Roll, R. & Ross, S. 1986. Economic forces and the stock market. Journal of Business 59(3): 83-403.
Cheung, Y. and L. Ng (1998), “International evidence on the stock market and aggregate economic activityâ€, Journal of Empirical Finance, 5, 281-296.
Clare, A. D. and Thomas, S. N. (1994),’Macroeconomic Factors, the APT and the UK Stock Market’, Journal of Business Finance and Accounting, 21, 309-330.
DeFina, R.H., 1991, Does Inflation Depress the Stock Market?, Business Review, Federal Reserve Bank of Philadelphia, 3-12.
Dickey, D. A. and W. A. Fuller (1981), Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, Volume 49, pp. 1057-72.
Dornbusch, R., & Fischer, S. (1980). Exchange rates and current account. American Economic Review, 70, 960-971.
Fama E.F. Stock Returns, Real Activity, Inflation and Money, American Economic Review, 1981, Vol. 71, No. 4, pp. 545-565.
Fama, E.F. and M. Gibbons. Inflation, Real Returns and Capital Investment, Journal of Monetary Economics, 1982, Vol. 9, No. 3, pp. 545-565.
Fama, E. F., (1990). Stock Returns, Expected Returns, and Real Activity, Journal of Finance 45, pp. 1089–1108.
Fama, E. F., and K. R. French, (1989). Business Conditions and Expected Returns on Stocks and Bonds, Journal of Financial Economics 25, pp. 23–49.
Fama, E.F. Efficient Capital Markets: II, Journal of Finance, 1991, Vol. 46, No. 5, December, pp. 1575-1617.
Ferson, W. and C. Harvey, 1991, “The variation of economic risk premiums,†Journal of Political Economy99, 385-415.
Frankel, J. A. (1983) Monetary and Portfolio-Balance Models of Exchange Rate Determination. In J. S. Bhandari and B. H. Putnam (eds) Economic Interdependence and Flexible Exchange Rates. 84–115
Flannery, M. J. & Protopapadakis, A. A. (2002), “ Macroeconomic factors do influence aggregate stock returns†, The Review of Financial Studies, 15, 3, 751-782
Gavin, M. (1989). The stock Market and exchange rate dynamics. Journal of international money and finance, 8, 181-200.
Gjerde, O. and F. Saettem. Casual Relations among Stock Returns and Macroeconomic Vari-ables in a Small, Open Economy, Journal of International Finance Markets Institutions and Money, 1999, Vol. 9, pp. 61-74.
Habibullah, M. (1998) Money, Output, Stock Prices in Malaysia: Further Evidence. Borneo Review135–155.
Habibullah, M., and A. Baharumshah (1996) Money, Output, Stock Prices in Malaysia: An Application of Cointegration Tests. International Economic Journal121–130.
Ibrahim, M. H. and W. S. W. Yusoff (2001), Macroeconomic variables, exchange rate, and stock price a Malaysian perspective. IIUM Journal of Economics and Management, Volume 9(2), pp. 141-63.
Karathanassis-Philippas (1988) Estimation of Bank Stock Price Parameters and the Variance Components Model. Applied Economics20:3, 497–507.
Khan, F., Rasli, A. M., Yusoff, R. M., Ahmed, T., ur Rehman, A., and Khan, M. M. (2014). Job Rotation, Job Performance, Organizational Commitment: An Empirical Study On Bank Employees. Journal Of Management Info, 3(1), 33-46.
Kraft, J., and A. Kraft (1977) Determinants of Common Stock Prices: A Time Series Analysis. Journal of Finance417–725.
Kwon, C.S. and T.S. Shin. Cointegration and Causality between Macroeconomic Factors and Stock Market Returns, Global Finance Journal, 1999, Vol. 10, No. 1, pp. 71-81.
Lintner, John.1965a.“The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.†Review of Economics and Statistics. February, 47, pp. 13–37.
Lintner, John.1965b. “Security Prices, Risk and Maximal Gains from Diversification.†Journal of Finance. December, 20, pp. 587–615.
Maysami, R.C. and T.S. Koh A. Vector Error Correction Model of the Singapore Stock Market, International Review of Economics and Finance, 2000, Vol. 9, pp. 79-96.
Maysami, R. C., Howe, L. C. & Hamzah, M. A. (2004). Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of Singapore’s All-S sector Indices. Journal Pengurusan, 24, 47-77.
Merton, R. (1973). An intertemporal capital asset pricing model. Econometrica, 41, 867-887. http://dx.doi.org/10.2307/1913811
Mossin, Jan.1966.“Equilibrium in a Capital Asset Market.†Econometrica. October, 35,pp. 768–83.
Mukherjee T.K. and A. Naka. Dynamic Relations between Macroeconomic Factors and the Japanese Stock Market: An Application of a Vector Error Correction Model, Journal of Financial Research, 1995, Vol. 18, No. 2, pp. 223-237.
Mukherjee, T. K. & Naka, A. 1995. Dynamic relations between macroeconomic factors and the Japanese stock market: an application of a vector error correction model. The Journal of Financial Research 18(2): 223-237.
Mundell, R.A. Inflation and Real Interest, Journal of Political Economy, 1963, Vol. 71, No. 3, June, pp. 280-283.
Pesaran MH, Shin Y, Smith RJ, 2000, “Structural analysis of vector error correction model with exogenous I(1) factorsâ€, Journal of Econometrics,97, 293-343
Pesaran MH.,Shin Y, 1999, “An Autoregressive Distributed lag Modeling Approach to contraption Analysis†Chapter 11 in Econometrics and Economic Theory in the 20 Century: The Ragner Frisch Centennial Symposium. Strom S (ed). Cambridge University Press: Cambridge.
Pesran, M.H.,Pesran B, 1997, with microfit 4.0 An interactive Approachâ€, Oxford University Press :Oxford.
Phillips, P.C. and Perron, P, 1988, Testing for a unit root in a time series regression, Biometrica, 75, 335-346.
Ratanapakorn, O. and Sharma, S. C. (2007), “Dynamic analysis between the US stock returns and the macroeconomic variablesâ€, Applied Financial Economics,17:5,369-377
Ross, S. A. 1976. The arbitrage theory of capital asset pricing. Journal of Economic Theory 13: 341-360.
Rozeff, M. (1974) Money and Stock Prices. Journal of Financial Economics245–302.
Rajan, R.G. and Zingales, L. (1995) What Do We Know about Capital Structure? Some Evidence from International Data, Journal of Finance, 50(5), 1421-60.
Schwetz, W. Tests for Unit Roots: A Monte Carlo Investigation, Journal of Business and Econometric Statistics, 1989, Vol. 7, No, 2, pp. 147-159.
Schwert, G. W. (1989), Why Does Stock Market Volatility Change Over Time‟, TheJournal of Finance, Vol. 44, No. 5, pp. 1115-1153 [Online] Available at: http://www.jstor.org/stable/pdfplus/2328636.pdf [Accessed 29 June 2009].
Sharpe, William F.1964“Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.â€Journal of Finance. 19:3, pp. 425–42
Sprinkel, Beryl W. Money and Stock Prices (Richard D. Irwin, Inc., 1964).
Wongbangpo P, Subhash CS (2002). Stock Market and Macroeconomic Fundamental Dynamic Interactions: ASEAN-5 Countries, J. Asian Econ., 13: 27-51
Yasir, M., Imran, R., and Irshad, M. K. (2013). Mediating Role Of Organizational Climate In The Relationship Between Transformational Leadership, Its Facets And Organizational Performance. Actual Problems of Economics/Aktual'ni Problemi Ekonomìki, 145(7).
Bailey, W., and Y. P. Chung, 1995, Exchange rate fluctuations, political risk, and stock returns: Some evidence from an emerging market, Journal of Financial and Quantitative Analysis 30, 541-561.
Bilson, Christopher M., Timothy J. Brailsford and Vincent J. Hooper, (2001), “Selecting Macroeconomic Variables as Explanatory Factors of emerging Stock Market Returnsâ€, Pacific-Basin Finance Journal, Vol.9 pp. 401-426.
Branson, W. H. (1983). Macroeconomic determinants of real exchange rate, Cambridge University Press, Cambridge, MA.
Black, A., P. Fraser and R. MacDonald, “Business Conditions and Speculative Assetsâ€, Manchester School, 1997, 4, 379-393.
Campbell, J. Y. and R. Shiller (1988), Stock prices, earnings and expected dividends, Journal of Finance, 43, 661-676.
Charemza,W.W. – Deadman, D.F. (1992), New Directions in Econometric Practice: General to Specific Modeling, Cointegration, Aldershot: Edward Elgar.
Chen N.F. Financial Investment Opportunities and the Macro economy, Journal of Finance, 1991, Vol. 16, No. 2, pp. 529-553.
Chen, N. F., Roll, R. & Ross, S. 1986. Economic forces and the stock market. Journal of Business 59(3): 83-403.
Cheung, Y. and L. Ng (1998), “International evidence on the stock market and aggregate economic activityâ€, Journal of Empirical Finance, 5, 281-296.
Clare, A. D. and Thomas, S. N. (1994),’Macroeconomic Factors, the APT and the UK Stock Market’, Journal of Business Finance and Accounting, 21, 309-330.
DeFina, R.H., 1991, Does Inflation Depress the Stock Market?, Business Review, Federal Reserve Bank of Philadelphia, 3-12.
Dickey, D. A. and W. A. Fuller (1981), Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, Volume 49, pp. 1057-72.
Dornbusch, R., & Fischer, S. (1980). Exchange rates and current account. American Economic Review, 70, 960-971.
Fama E.F. Stock Returns, Real Activity, Inflation and Money, American Economic Review, 1981, Vol. 71, No. 4, pp. 545-565.
Fama, E.F. and M. Gibbons. Inflation, Real Returns and Capital Investment, Journal of Monetary Economics, 1982, Vol. 9, No. 3, pp. 545-565.
Fama, E. F., (1990). Stock Returns, Expected Returns, and Real Activity, Journal of Finance 45, pp. 1089–1108.
Fama, E. F., and K. R. French, (1989). Business Conditions and Expected Returns on Stocks and Bonds, Journal of Financial Economics 25, pp. 23–49.
Fama, E.F. Efficient Capital Markets: II, Journal of Finance, 1991, Vol. 46, No. 5, December, pp. 1575-1617.
Ferson, W. and C. Harvey, 1991, “The variation of economic risk premiums,†Journal of Political Economy99, 385-415.
Frankel, J. A. (1983) Monetary and Portfolio-Balance Models of Exchange Rate Determination. In J. S. Bhandari and B. H. Putnam (eds) Economic Interdependence and Flexible Exchange Rates. 84–115
Flannery, M. J. & Protopapadakis, A. A. (2002), “ Macroeconomic factors do influence aggregate stock returns†, The Review of Financial Studies, 15, 3, 751-782
Gavin, M. (1989). The stock Market and exchange rate dynamics. Journal of international money and finance, 8, 181-200.
Gjerde, O. and F. Saettem. Casual Relations among Stock Returns and Macroeconomic Vari-ables in a Small, Open Economy, Journal of International Finance Markets Institutions and Money, 1999, Vol. 9, pp. 61-74.
Habibullah, M. (1998) Money, Output, Stock Prices in Malaysia: Further Evidence. Borneo Review135–155.
Habibullah, M., and A. Baharumshah (1996) Money, Output, Stock Prices in Malaysia: An Application of Cointegration Tests. International Economic Journal121–130.
Ibrahim, M. H. and W. S. W. Yusoff (2001), Macroeconomic variables, exchange rate, and stock price a Malaysian perspective. IIUM Journal of Economics and Management, Volume 9(2), pp. 141-63.
Karathanassis-Philippas (1988) Estimation of Bank Stock Price Parameters and the Variance Components Model. Applied Economics20:3, 497–507.
Khan, F., Rasli, A. M., Yusoff, R. M., Ahmed, T., ur Rehman, A., and Khan, M. M. (2014). Job Rotation, Job Performance, Organizational Commitment: An Empirical Study On Bank Employees. Journal Of Management Info, 3(1), 33-46.
Kraft, J., and A. Kraft (1977) Determinants of Common Stock Prices: A Time Series Analysis. Journal of Finance417–725.
Kwon, C.S. and T.S. Shin. Cointegration and Causality between Macroeconomic Factors and Stock Market Returns, Global Finance Journal, 1999, Vol. 10, No. 1, pp. 71-81.
Lintner, John.1965a.“The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.†Review of Economics and Statistics. February, 47, pp. 13–37.
Lintner, John.1965b. “Security Prices, Risk and Maximal Gains from Diversification.†Journal of Finance. December, 20, pp. 587–615.
Maysami, R.C. and T.S. Koh A. Vector Error Correction Model of the Singapore Stock Market, International Review of Economics and Finance, 2000, Vol. 9, pp. 79-96.
Maysami, R. C., Howe, L. C. & Hamzah, M. A. (2004). Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of Singapore’s All-S sector Indices. Journal Pengurusan, 24, 47-77.
Merton, R. (1973). An intertemporal capital asset pricing model. Econometrica, 41, 867-887. http://dx.doi.org/10.2307/1913811
Mossin, Jan.1966.“Equilibrium in a Capital Asset Market.†Econometrica. October, 35,pp. 768–83.
Mukherjee T.K. and A. Naka. Dynamic Relations between Macroeconomic Factors and the Japanese Stock Market: An Application of a Vector Error Correction Model, Journal of Financial Research, 1995, Vol. 18, No. 2, pp. 223-237.
Mukherjee, T. K. & Naka, A. 1995. Dynamic relations between macroeconomic factors and the Japanese stock market: an application of a vector error correction model. The Journal of Financial Research 18(2): 223-237.
Mundell, R.A. Inflation and Real Interest, Journal of Political Economy, 1963, Vol. 71, No. 3, June, pp. 280-283.
Pesaran MH, Shin Y, Smith RJ, 2000, “Structural analysis of vector error correction model with exogenous I(1) factorsâ€, Journal of Econometrics,97, 293-343
Pesaran MH.,Shin Y, 1999, “An Autoregressive Distributed lag Modeling Approach to contraption Analysis†Chapter 11 in Econometrics and Economic Theory in the 20 Century: The Ragner Frisch Centennial Symposium. Strom S (ed). Cambridge University Press: Cambridge.
Pesran, M.H.,Pesran B, 1997, with microfit 4.0 An interactive Approachâ€, Oxford University Press :Oxford.
Phillips, P.C. and Perron, P, 1988, Testing for a unit root in a time series regression, Biometrica, 75, 335-346.
Ratanapakorn, O. and Sharma, S. C. (2007), “Dynamic analysis between the US stock returns and the macroeconomic variablesâ€, Applied Financial Economics,17:5,369-377
Ross, S. A. 1976. The arbitrage theory of capital asset pricing. Journal of Economic Theory 13: 341-360.
Rozeff, M. (1974) Money and Stock Prices. Journal of Financial Economics245–302.
Rajan, R.G. and Zingales, L. (1995) What Do We Know about Capital Structure? Some Evidence from International Data, Journal of Finance, 50(5), 1421-60.
Schwetz, W. Tests for Unit Roots: A Monte Carlo Investigation, Journal of Business and Econometric Statistics, 1989, Vol. 7, No, 2, pp. 147-159.
Schwert, G. W. (1989), Why Does Stock Market Volatility Change Over Time‟, TheJournal of Finance, Vol. 44, No. 5, pp. 1115-1153 [Online] Available at: http://www.jstor.org/stable/pdfplus/2328636.pdf [Accessed 29 June 2009].
Sharpe, William F.1964“Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.â€Journal of Finance. 19:3, pp. 425–42
Sprinkel, Beryl W. Money and Stock Prices (Richard D. Irwin, Inc., 1964).
Wongbangpo P, Subhash CS (2002). Stock Market and Macroeconomic Fundamental Dynamic Interactions: ASEAN-5 Countries, J. Asian Econ., 13: 27-51
Yasir, M., Imran, R., and Irshad, M. K. (2013). Mediating Role Of Organizational Climate In The Relationship Between Transformational Leadership, Its Facets And Organizational Performance. Actual Problems of Economics/Aktual'ni Problemi Ekonomìki, 145(7).