The Stock Market Volatility Loading with Macroeconomic Variables: KSE 100 Index as Evidence in Pakistan

Abstract

A quite significant relationship is found between macroeconomic variables and stock prices. The prediction of stock prices has always been a curious object among the investors. The stock exchange plays a vital role to investigate the economic growth of any country. It is an approach to utilize unproductive funds into meaningful ways. An enriched study exists in the world to explore the relationships of economic variables and stock prices. When we take the equity market of Pakistan into consideration, only a little work is found done on the query of the existence of the casual relationship among the macroeconomic variables and stock prices. This scarcity of available literature and data makes the future predictions about equity prices inconsistent in the perspective of Pakistan. The current study is pregnant with its ultimate object to discover the correlation and impacts existing between macroeconomic variables and stock market (KSE 100). The macroeconomic variables like, bank rate, foreign exchange reserves, wholesale price index (WPI), industrial production index (IPI), broad money M3 and real effective exchange rate are used as independent variables while closing prices of Karachi stock exchange (KSE 100) are used as a dependent variable. The data for the stated purpose is taken from the period spanning over twelve years (2000 to 2012) on the monthly basis. The statistical tests like descriptive statistics, correlation, unit root augmented Dickey fuller test, Johansen’s co-integration test and ordinary least squares (OLS) regression are used. The study findings indicate that the bank rate and foreign exchange reserves have co-integration while WPI, IPI, M3 and real exchange rate have no co-integration to each other. The findings also indicate that there exists a negative correlation while there are found no impacts of macroeconomic variables on the stock market (KSE 100) in case of Pakistan. Thus present study concludes with the results that the future stock prices are not predictable in the context of Pakistan.