Abstract:
Stock markets play a vital role in the economic
development of a country. They also serve as a medium
where investors can invest and businesses can raise
capital. For this reason, an understanding of the factors
which impact stock market prices is important.
Considerable work has been done on the impact of macroeconomic
factors on stock prices in developed countries,
but the amount of literature available on developing
economies, particularly Pakistan, is limited. This
research studies the impact of one such variable,
interest rates, on stock prices in Pakistan. Daily 6-
month KIBOR rates and KSE-100 index data was collected
for a nine year period, from September 2001 to June 2009.
The data was analyzed using statistical tools like
Augmented Dickey Fuller Test, Ordinary Least Squares
regression, Generalized Autoregressive Conditional
Heteroskedasticity model and Granger-Causality Test. The
results proved that interest rate changes have a causal
relationship with stock prices in Pakistan. Moreover,
they have a negative relationship with stock prices. This
implies that an increase in interest rates in Pakistan
causes stock prices to decline and vice versa.
