Do the changes in macroeconomic variables have a symmetric or asymmetric effect on stock prices? Evidence from Pakistan

Abstract

Purpose The purpose of this paper is to examine whether macroeconomic variables have a symmetric or asymmetric effect on stock prices (SP) of Karachi Stock Exchange 100 index in the context of Pakistan. It also examines whether the asymmetric impact of macroeconomic variables on SP has been affected by tail events such as the global financial crisis. Design/methodology/approach This study uses linear and nonlinear autoregressive distributed lag models for the full sample period as well as in pre- and post-crisis periods. The whole sample period covers the data from June 2004 to June 2016 which include 145 observations in total. The pre-crisis period covers data from June 2004 to December 2007 and the post-crisis period covers the data from January 2009 to June 2016 where these periods include 43 and 90 observations, respectively. Findings The findings suggest that the relationship between macroeconomic variables and SP is asymmetric in the short run whereas this effect is symmetric in the long run when the whole sample period is selected. However, when pre- and post-crisis periods are selected this effect becomes asymmetric in the long run as well; that is, positive and negative shocks in macroeconomic variables do not affect the SP in the same way. Practical implications Investors, governments and other stakeholders are advised to consider the asymmetric behavior of macroeconomic variables and SP while making an investment or other decisions. They may consider the financial crisis as well since the asymmetric behavior of the underlying variables change as a result of the financial crisis. Originality/value This study extends previous studies by examining the asymmetric effect of macroeconomic variables and also contributes to the existing literature by discussing how this relationship changes as a result of the financial crisis.

Impact of macroeconomic variables on the performance of stock exchange: a systematic review

“…We have discovered a small number of developed and developing countries with a positive relationship (See Table 4). Fama (1981), Mukherjee and Naka (1995) and Ho (2017) found a negative relation with stock returns while Barakat et al (2015) and Chang and Rajput (2018) found a positive relation in Egyptian stock and Karachi stock, respectively. They clarified that an increase in inflation as a result of increased demand for current supply raises firms' earnings and dividends.…”

The effect of the global financial crisis on the asymmetric relationship between exchange rate and stock prices

“…() that is nonlinear Autoregressive Distributed Lag (NARDL) which is nascent econometric techniques that determine the asymmetric effect of exchange rate changes on the stock prices both in the short run and in the long run. This technique can be used in the mixture of the order of integration (I(0) & I(1)) just avoiding an order of integration as I(2) for the variables under study (Anjum, Ghumro, & Husain, ; Chang & Rajput, ; Chang, Rajput, & Ghumro, ).…”

“…Fratzscher () also indicate that the asymmetric effect of financial and economic variables is affected by the global financial crisis. Chang and Rajput () conduct study in the context of Pakistan for examining the asymmetric effect of macroeconomic variables on stock prices. Their findings conclude that the asymmetric relationship between macroeconomic variables and stock prices changes as a result of the financial crisis.…”

Asymmetric Effects of Exchange Rate and Its Relationship with Foreign Investments: A Case of Indian Stock Market

“…The study done by Sui and Sun (2016) observed that trade flow model better explains the exchange rate transmission to BRICS stock market. Recent study done by Chang and Rajput (2018) by which asymmetric effects of different macroeconomic variables such as consumer price inflation, interest rate, industrial production and REER were studied on stock prices. Bahmani-Oskooee and Kanitpong (2017) found that the presence of asymmetry in real exchange rates on the trade balance, that is, the effect of appreciation or depreciation of the local currencies of nations have a different impact on their imports and exports.…”