IMPACT OF INTEREST RATE ON STOCK MARKET PERFORMANCE OF KSE-30 INDEX

Abstract

The purpose of the study is to find out the relationship between Interest rate and KSE-30 Index performance and also the impact of volatility of interest rate on KSE-30 Index performance. We use KSE-30 Index as a measure of Stock market index performance and the 3-months Treasury bill rate as a proxy to Interest rate. The monthly data is taken from the period of September 2006 to December 2013. The time series Data is analyzed quantitatively with the help of E-views using various tools such as (Correlation matrix, Regression analysis, Granger Causality & Unit Root Test). At ADF& level the data was not stationary, but at 1st difference it becomes stationary. Correlation matrix results showed that KSE-30 Index and Treasury bill are strongly negatively co-related with each other as their value is -0.772. The p value of 0, which is less than p < (0.05) indicates that we can reject the null hypothesis and the regression results are significant. The Regression result also indicates that there exist a long term Inverse relationship between Treasury bill rate and Stock market Performance. With the increase in Treasury bill rate by 1 % KSE-30 index will decrease by 1.22%. The value of R-square indicates that 59.64% change KSE- 30 Index is caused by change in Treasury bill rate. The Granger Causality Test indicates that T-Bill granger cause KSE. The GC test also indicates that in the short run any changes Treasury bill cause changes Stock index performance. The findings of this paper will help investors and potential investors to check the relationship & how interest rate is effecting the Stock market performance in Pakistan .It will help companies to identify the periods to get listed on Stock Exchange.