Does Exchange Rate and PSX co-move?

Abstract

The fluctuation in exchange rate is widely regarded as the most influential and compelling factor influencing stock market performance. A country's growth and development are associated with the stock market. The study's main purpose is to figure out how the forex rate and the Pakistan stock market return move together. This study includes two currency rates, the US dollar and the Pakistani rupee, which were examined to determine causality in the KSE-1 00 indices. Different statistical tests are used to thoroughly investigate the relationship among both these financial variables. These test includes, Descriptive Statistics, ADF test, Autocorrelation, correlation analysis/ correlation matrix, Johnsen Co-integration test and Unidirectional Model of Regression being tile sing!e selected dependent and independent vari3bles. Finc:lly, the Granger Causality Test was used to determine if the forex rate (independent variable) or the stock exchange markets (dependent variable) cause each other, and the results were interpreted accordingly. The analysis is based on time series data acquired from the secondary module for the period of ten years from 1st Jan 2010 to 31st Dec 2020. Unit Root Test examined that series is non-stationary at level and series is stationary at their first difference. Autocorrelation test revealed that the data is stationary at level and the data is observed lying in standard deviation area as depicted in the line set over. Correlation Matrix reflects that forex rate is positively correlated with stock exchange return. Johnsen Co-integration test showed that variables are co-integrated at significant level and there exist two co-integrating equations among both these financial factors. Ganger Causality test elaborated that there is a positive and statistically significant causal effect of Forex Rate on Stock Exchange Market returns and both these variables co-move but uni-directionally. Based on the findings, it has been established that both these financial variables are uni-directionally related in developing countries like Pakistan whereby the forex rate volatility and stock mark~t indices are linked. Therefore, people who want to invest should use information about important macroeconomic variables, particularly exchange rate volatility, to envisage the behavior of the stock market.