The Stock Market and the Economy in Pakistan

Abstract

This paper re-examines the causal relationship between stock prices and macro variables like consumption expenditure, investment spending, and economic activity (measured by GDP) in Pakistan. Using annual data from 1959-60 to 1998-99 and applying cointegration and error correction analysis, the paper indicates the presence of long-run relationship between stock prices and macro variables. Regarding the cause and effect relationship, the analysis indicates a one-way causation from macro variables to stock prices, implying that in Pakistan fluctuations in macro variables cause changes in stock prices. The findings suggest that the stock market in Pakistan is not that developed to play its due role in influencing aggregate demand. A disturbing feature of the stock market in Pakistan is that it cannot be characterised as the leading indicator of economic activity. In the absence of other strong indicators, shooting up of stock prices may indicate a speculative bubble.

Analysis of the impact of select macroeconomic variables on the Indian Stock Market: A heteroscedastic cointegration approach

“…They concluded that crisis was due to poor policy formulation on the part of the policy maker as they lacked both credibility and transparency. Husain & Mahmood (2001) used the cointegration and the error correction analysis to examine the relationship between the stock prices and the macro variables, namely consumption expenditure, investment spending and GDP. They found that there exist a long-term relationship between stock prices and the macro variables.…”

The Impact of Foreign Direct Investment on Stock Market Development: Evidence From Pakistan

“…consumption, investment, gross domestic product, index of industrial production). For example, Husain and Mahmood (2001) indicated one-way causation from macroeconomic variables to stock prices. Nishat and Shaheen (2004) reported that bidirectional causality exists between industrial production and stock prices.…”

Long Run Relationship between Selected Macroeconomic Indicators and Banking Sector in Pakistan

“…The Method section describes in detail how the study was conducted, including conceptual and operational definitions of the variables used in the study, Different types of studies will rely on different methodologies; One of the previous studies conducted by Husain and Mahmood (2001) investigated the causal relationship between the stock market and economic growth in Pakistan. Farooq, Keung, and Kazmi (2004) conducted research to find out the existence of the causal relationship between the stock exchange prices and Exchange rate in Pakistan, and for this analysis, the stock market prices were taken from KSE.…”

“…The study investigated long run relationship as well as causality between selected macroeconomic indicators and stock prices at LSE. Husain and Mahmood (2001) A study conducted by Kim (2003) suggested that stock returns in U.S are positively associated with the industrial production but is negatively related to the exchange rate, interest rate, and inflation in the long run. Gan, Lee, Yong, and Zhang (2006) found that macroeconomic variables interest rate, money supply, and real GDP does Granger cause stock returns in New Zealand and the stock market in New Zealand is not a leading indicator for changes in selected macroeconomic variables in the study.…”