IMPACT OF MACROECONOMIC FACTORS ON CAPITAL MARKET OF PAKISTAN (1994-2013)

Abstract

Aim: This study aims to examine the impact of macroeconomic factors on capital market of Pakistan. It assesses the extent to which key macroeconomic variables influence stock performance and which variables out of these have highest impact on capital market. Methodology: The study involved six independent variables and one dependent variable. Interest rate, money supply, gold price, oil price, and foreign direct investment are selected as independent variables along with a dummy variable accounting for political stability and KSE-100 index is selected as dependant variable. The time period examined is 1994-2013 (20 years) and all the tests are conducted based on average annual data. To analyze the data, regression analysis, descriptive statistics, pair-wise correlation and Augmented Dickey Fuller (ADF) unit root test and models are used. Results: The findings indicate that interest rate and oil prices are negatively related while money supply, gold prices and FDI are positively related with the stock market performance. Among all these variables, interest rate is moderately correlated with the stock market while money supply, oil prices, gold prices and FDI are strongly correlated with the KSE. The results also indicate that stock market index rises up during dictatorial tenure while declines or shows instability during democratic period. Implications: The outcomes of the research might facilitate investors in taking effective investment decisions by estimating the expected trend in macroeconomic factors. It will also help the policy makers to develop robust institutional and regulatory reforms that would strengthen the stock market and safeguard investors’ interests.