Macroeconomic Variables and Stock Prices in Pakistan and United States

Abstract

Stock Markets play a vigorous role in the economic growth of a country. These equity markets help businesses to raise funds from investors who have surplus money. Either businessman or investor, one must be fully aware of the dynamics of stock market. Therefore, an understanding of factors which impact stock markets is equally important. Though, a lot many researches have been done on the impact of variables-individually and collectively- on stock prices in developed as well as under-developed countries, yet little work has been done in this regard that relates to Pakistan. This research studies the impact of macroeconomic variables on stock prices in Pakistan and the United states. Four macroeconomic variables i.e. Gross Domestic Product (GDP), Exchange Rate, Discount Rate and Inflation Rate are taken for both Pakistan and US, and their impact is studied on the Karachi Stock Exchange (KSE-100) index for Pakistan and New York Stock Exchange (NYSE Composite) Index for the US. Forty year annual data from 1974 to 2013 is used for this purpose. Results were found by applying different tests, such as Augmented Dickey Fuller (ADF) test, Ordinary Least Square (OLS) Regression and Granger Causality Test. Results reveal that there exists significant positive relationship between stock prices and macroeconomic variables in case of Pakistan. While in the US, this relationship was found to be significantly negative. The Granger Causality Test results reveal unidirectional causality between the variables in case of both Pakistan and the United States.