Impacts of Capital Inflows and Global Economic Policy Uncertainty on Stock Returns: Evidence from an Emerging Stock Market

Abstract

This thesis explores the short-run and long-run macroeconomic determinants of the Pakistani stock returns under the impact of global economic policy and capital inflows ambiguity via the ARDL process and the monthly data for the period of 2000:M1 to 2019:M10. The set of macroeconomic variables utilized in the study are the stock market price indexes of Pakistan’s PSX100 index, PSX Financial Index (PSXFIN) and the PSX Industrial Index (IND), Industrial Production Index (IP), Real Effective Exchange Rate (RER), Consumer Price Index (CPI), Interest Rate (INTR), capital inflows which is the sum of foreign direct and portfolio investment coming to Turkey (FDIPORT) and the Global Economic Policy Uncertainty index (GEPU). The ARDL estimation results reveal that in the long-run the PSX stock returns are certainly affected from the fluctuations in IP, RER, CPI and FDIPORT. The outcome of the changes in GEPU on the stock returns is negative. The long run determinants of the PSX stock returns are the changes in IPI, RER, and CPI and the EPU. The outcome of the fluctuations in the INTR on the stock returns is insignificant. The influence of the changes in RER on stock returns is significantly positive for the PSX100 and PSXFIN indexes, but has no significant effect on the PSXIND stock returns. The estimation results suggest that the capital flows and global economic policy uncertainty are essential factors for the Pakistani stock returns.