Research

Research Impact of Macroeconomic Indicators on Different . . .

IMPACT OF MACROECONOMIC
INDICATORS ON DIFFERENT
CAPITAL MARKETS IN PAKISTAN
Bilal Nafees1, Faisal Javaid2 & Muhammad Ali Jibran Qamar3

Abstract

This research is about determining the relationship of macro-

economic variables with different capital market indices of Pakistan.
Therefore, for this purpose ARDL (Autoregressive Distributed Lagged
Model) approach to co-integration has been applied to determine
the long run relationship and Toda-Yamamoto causality test to
determine the uni-directional relationship. It is found that the impact
of different macro-economic variables is not exactly the same on
different capital market indices. According to ARDL results, Money
supply (M2) and GDP has positive significant, whereas discount rate
has negative significant impact on KSE100 index.In case of Lahore
stock exchange, none of the macroeconomic variable has significant
impact on LSE25 index. According to the results of Toda-Yamamoto
causality, only inflation has causal relationship with KSE100 and
LSE25 index.

Keywords: Macroeconomic Indicators, Capital Market Indices, Unit

Root Test, Co-integration and Toda-Yama Moto Causality.
JEL Classification: M 210

1-Management Sciences Department, University of Education, Lahore, Pakistan

2-Management Sciences Department, University of Gujra t, Sialkot Campus,
Pa kistan
3-Department of Management Sceinces, COMSATS Institute of Informa tion
Technology, Lahore, Pakistan
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Impact of Macroeconomic Indicators on Different . . . Research

Introduction

Capital markets are an essential part of economy of any

country. The capital markets play a critical role in the development
and growth of the financial and non-financial sectors. It ultimately
affects the country’s economy to great extent. Therefore, government,
industrial sector, central bank of the country and the most important
regulators keep close eye on the activities of the capital markets.

The common relationship between the capital market growth

and fluctuations in the national economy was observed long-ago.
Whenever, capital market of country performs well it leaves a positive
impact on economic outlook of the country.

However, deteriorating market share prices can hinder the

ability of company to raise finance from capital markets. Such
companies that are with attractive high share price and wish to expand
through raising equity, often do so by issuing more common stocks,
in this way companies borrow at low cost. Conversely, it turn out to
be much more problematic for such companies that have less attractive
and deteriorating share prices as well.

The capital markets are considered as basis of business

investment because companies offer new shares to finance investment
thus leads to more jobs and economic growth. The capital markets are
also considered as basis of equity financing. However, Capital market
that fluctuates continuously can create a huge impact over economy.

During the last one-and-half decade Rs, 1 trillion has been

raised by the corporate sector in the form of debt and equity through
the capital markets. Out of this 20 percent has been raised by the
Government of Pakistan via privatization through capital markets.4

4-www.kse.com.pk

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The investors base stand at just around 250,000 since 1948

in Pakistan. This is too small as compare to Bangladesh, Turkey and
Iran,in which over one and six million Investors are registered with
capital markets respectively5. Therefore, in Pakistan there is a need to
increase investors base because narrow investors not only cause
market volatility and low liquidity but also make the price discovery
mechanism inefficient. The narrow investor base also discourages
the companies that have the potential to be listed on capital markets
because such companies feel that listing might deprive them from the
incentive to raise long-term capital.

Capital market performance is a basic attribute for economic

growth because decline in capital market index pushes economy in
depression while vice versa contributes in economic development.
Capital market indices are statistical measures to determine the state
of the capital market for stakeholders. However, during last two
decades, researchers have put emphasis on the importance of efficient
capital markets because researchers have found that better governed
capital market lays positive impact on economic growth.

At present, in Pakistan, there are three recognized capital

markets. Amongst allcapital markets, Karachi Stock Exchange (KSE)
is the largest in terms of both market capitalization and operations.
The KSE started its operations in 1949. At the time of inauguration, it
was having 54 members and 13 companies were listed. The paid up
capital was Rs. 110 million. As time passes, the KSE remain flourished
and by the end of late nineties registered companies had reached up
to 200 with paid up capital Rs. 18.8 billion. In 2008,increase in number
of registered companies had reached up to 653 that was highest in
history. In 2013, total number of listed companies in KSE were 569
with 5,153,173.78 billion of market capitalization. The second large
capital market of Pakistan is Lahore stock exchange (LSE). The
inauguration of LSE had taken place in 1971 with a vision to widen the

5-http://customstoday.com.pk/

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Impact of Macroeconomic Indicators on Different . . . Research

investment base, to develop and flourished capital market in Punjab.

Mostly companies that are listed in LSE are those that are also listed
in KSE.

The literature about macro-economic variables and stock

prices is well establish in developed countries using modern data sets
as well as econometric techniques. On the contrary, such literature is
very limited in thr context of Pakistan. This paper extends the existing
literature in three dimension. We explored literature gap, how different
macro-economic variables could have an impact on both capital markets
of Pakistani.e. KSE, LSE. Whereas, the previous studies have just
focused on KSE.As the impact of macroeconomic variables on capital
markets is well establish in developed economies. Therefore, it is
important to know that whether in developing country like Pakistan
macroeconomic changes should be incorporated while making
investment decision for capital markets or not. Second, this study is
different because of the unique data set used in this study. Third, this
paper follows modern econometric techniques that overcome
shortcomings of time series data.The research objective is to identify
the impact of macro-economic variables (Discount Rate, Money Market
Rate,T-bills Rate,Real Exchange Rate, Money Supply, Inflation and
GDP (Gross Domestic Product), on capital market index of KSE and
LSE.

Literature Review

In Pakistan,the mac-economic variables granger cause the

movement of stock prices (Nishat, Shaheen et al. 2004). Changes in
interest rate, exchange rate and money supply have impact on the
stock prices in the short run in Pakistan(Hasan and Nasir 2008). Stock
market prices have been found an important indicator of
economy(Sohail and Hussain 2009). The causal relationship does not
exist between macro-economic indicators and stock prices(Ali, Rehman
et al. 2010). Macro-economic variables are significant to explain stock
prices return in emerging equity market(Bilson, Brailsford et al.

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Research Impact of Macroeconomic Indicators on Different . . .

2001).There exist significant long run relationship between macro-

economic variables and stock prices in Pakistan (Hussain, Aamir et al.
2012).The monetary policy has positive and significant impact on
stock prices in Pakistan(Qayyum and Anwar 2011).Aggressive supply
of money and low interest rates are beneficial for investors and they
prefer stocks over bonds(Mishkin 2001). Capital market liberalization
has long-term positive impact on growth of economy. Whereas,
private investment has a positive impact on capital market in short
run for developed countries(Benson Durham 2002).Inflation do not
impact stock prices, monetary policy that ensures stock price stability
may have beneficial impact on capital markets (Cassola and Morana
2004). Macroeconomic indicators and capital market indices have
stable dependence in the long and the short run (Nishat and Shaheen
2004).

Three important factor economic growth, foreign portfolio

investment and financial liberalization policies have significant impact
on capital market development(El-Wassal 2005).

Gross domestic product, interest rate, money supply these

indicators have sound connection with capital market
performance(Binswanger 2001), (Laopodis 2007), (Agrawalla and
Tuteja 2007) and (Padhan 2007).

Tight monetary policy declines the stock market capitalization

and stock prices are considerably interest rate sensitive. Therefore,
interest rate should be considered as an important information while
forecasting the stock prices. (Ioannidis and Kontonikas 2008).In Africa
0.6 %increase in capital market development is caused through
development in financial intermediary sector (Yartey 2008).

The lending rates on bank deposit money have adverse

impact on performance of stock market. Inflation impacts negatively
the stock market performance in Ghana(Kyereboah-Coleman and
Agyire-Tettey 2008). In the long run, consumer price index, exchange

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Impact of Macroeconomic Indicators on Different . . . Research

rate, Treasury bill rate, and foreign direct investment cointegrate with
stock market prices. Whereas, consumer price index and exchange
rate movement matter in the short run to predict stock prices
movement(Adam and Tweneboah 2008).

It is found via Johansen co-integration testthat

macroeconomic indicators have significant impact on the capital market
performance in long run. Differences in monetary and fiscal policies
among different countries reported multiple effects of macroeconomic
indicators on the capital market indices performance(Pilinkus 2010).It
is important to think through fiscal and monetary policies while
understanding the relationship between capital market performance
and macroeconomic policies (Chatziantoniou, Duffy et al. 2013).

Research Methodology

Data collection

Data of selected for macro-economic variables has been take

from the International financial statistics (IFS) developed by
International Monetary Fund (IMF) except Gross Domestic Product
(GDP) data. GDP data developed by Pakistan Institute of Development
Economics (PIDE) on quarterly basis has been used. The data of
KSE100 index and LSE25 index has been collected from khistocks
database developed by business recorder Pakistan and from website
of Lahore stock exchange respectively. The collected data is on
quarterly basis ranging from 2000-2015, therefore giving maximum
sixty-four observations. Results of Unit root test, causality and Co-
integration have been obtained using E-Views and Micro fit software
respectively.

Different Stationarity Tests

The data inherits time series characteristics. Therefore, it is

necessary to check the level of stationarity to avoid spurious results.

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So, different unit root tests that have been applied to check
stationarity of the time series data, namely are, Augmented Dickey
Fuller (ADF), Augmented Dickey-Fuller Generalized Least Square Test
(ADF-GLS), Phillips-Perron (PP) and NG Perron test. All these tests
have been applied with intercept and intercept & trend only. A time
series data will be known as stationary time series, if its means and
variances are constant over the time and covariance between two
time periods not depends on the actual time lag for which the
covariance is computed. Following are the three properties of such
time series data that is stationary.

 E(Xt) = Expected value of Xt for all t is constant

 Var (Xt) = Variance of Xt for all value of t is constant

 Cov (Xt,, Xt+k) = the covariance for all t and k ‘“ 0 is

constant

The first test that has been applied to check the stationarity of
time series data is known as ADF test. This test was developed by
Dickey and Fuller in 1979. In this test, independent variable is extra
lag of dependent variable. ADF test has been applied considering
two cases i.e. with intercept and trend & intercept.

∆ = + −1 + −1 + € … … … (1)
=1

∆ = + Ϋ + −1 + −1 + € … . (2)
=1
Further, decision relating to the acceptance and rejection of
null hypothesis will be made on the basis of critical values given by
(McKinnon 1991).

The second test to check unit root stationarity is ADF-GLS

test. This test was developed by (Elliott, Rothenberg et al. 1996). This
test is similar to augmented dickey fuller test except in one aspect. In

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Impact of Macroeconomic Indicators on Different . . . Research

this test, before performing it, the time series is transformed through
generalized least squares regression. This test is considered more
powerful than the augmented dickey fuller test.

The third test to check unit root stationarity is Phillips-Perron

test. This test was proposed by(Phillips and Perron 1988). This test is
the modification of augmented dickey fuller test. Therefore, in this
approach of unit root test, some mild assumptions were considered
with dickey fuller test. PP test considers fewer restrictions to remove
serial correlation as compare to ADF test. The critical values of this
test were developed by (McKinnon 1991).

The fourth test to check unit root stationarity is NG Perron

test.NG Perron test was developed by (Ng and Perron 1995). In this
unit root test, four dissimilar test statistics have been developed. This
test is actually the modification of (Phillips and Perron 1988) test. The
procedure of selecting the lag length in this test ensures stable results
and minimum loss of power. This is the main advantage of using this
test.

ARDL Approach to Co-integration

ARDL stands for autoregressive distributed lagged model.

This approach first time was propose by (Pesaran and Pesaran 1997)
and (Pesaran and Shin 1998). Then, advance form of this approach to
co-integration was proposed by (Pesaran, Shin et al. 2001). This
approach is considered appropriate if the dependent variable is
integrated of I(1). Further, if some of the independent variables have
order of integration I(0) and some of the independent variables have
order of integration I(1) in context of stationarity of the time series
then ARDL approach to co-integration is considered appropriate.
ARDL approach to co-integration eliminates the problem of
endogeneity. ARDL approach to co-integration assumes that given
time series is a function of current and it’s lagged and lagged values
of one or more given explanatory variables. Many studies have proved

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that ARDL approach to co-integration is better as compare to

conventional approach to co-integration such as: (Engle and Granger
1987); (Johansen 1988), (Johansen-Juselius1990), (Gregory and
Hansen 1996; Saikkonen and Lütkepohl 2000). Sample set of this
study has sixty-four number of observations and this approach to
co-integration is better if data set consists of (30-80) observations.

Toda-Yamamoto Causality

Toda-Yamamoto test is applied to check the causal

relationship. This approach was proposed by Toda and Yamamoto
(1995). Further, enhancement was brought by Rambaldi and Doran
(1996), Zapata and Rambaldi (1997) and (Nishiya, Toda et al. 1998).
This approach is better over conventional error correction model.
While applying this causality test modified Wald restrictions are
applied to obtain results. The lag length is determined using schwartz
criterion. While applying Toda-Yamamoto test, it is not necessary to
check the co-integration as prerequisite amongst all variables. In this
testχ2-distribution is followed when VAR (k + dmax) is applied for
estimation. In VAR (k + dmax), k is maximum lag length, this will be
determine using schwartz criterion and dmax is the maximum order of
integration observed in the given data set. Having determined the (k
+ dmax), system equation is written for each variable. Then, seemingly
unrelated regression (SUR) is applied using system equation. SUR
takes care of the possible simultaneous unbiased, this is considered
one of the prime advantage of using SUR.

Table.1 shows the results of unit root tests determined

through ADF and ADF-GLS test along with critical values of tests. As
far as ADF test results are concerned, money supply and inflation is
stationary at level only with intercept. Inflation is also stationary at
level with trend & intercept. Unlike to this the discount rate, money
market rate, T-bills rate and real exchange rate have been found
stationary with intercept and trend & intercept at first difference.

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Results and Discussion

Table.1
Dickey-Fuller Generalized Least Square Test
Augmented Dickey-Fuller Test (ADF)
(DF-GLS)
At level At first Difference At level At first Difference
Trend& Trend& Trend& Trend&
Variables Intercept Intercept Intercept Intercept
Intercept Intercept Intercept Intercept
Panel A
Discount -
-1.867 -1.957 -4.394*** -4.351*** -1.880 -1.968 -4.440***
Rate 4.439***
Money MKT - - -
-1.684 -2.092 -1.637 -2.089 -9.455***
Rate 10.350*** 10.243*** 8.630***
-
T-Bills Rate -1.800 -1.958 -4.004*** -3.954** -1.793 -2.022 -3.983***
3.763***
Real
-
Exchange -2.285 -2.739 -6.023*** -6.164*** -1.898 -2.232 -5.155***
4.631***
Rate
Money -
-2.795* -1.558 -7.256*** -1.219 -2.163 -4.884***
Supply( M2) 3.830***
-
Inflation -2.768* -3.701** -2.460**
3.792***
GDP -1.391 -0.753 -2.207 -2.346 -0.702 -1.244 -2.211** -2.434
Panel B
KSE100 -
-0.301 -1.779 -5.611*** -5.579*** 0.395 -1.828 -5.581***
Index 5.396***
LSE 25 -
-1.489 -1.595 -7.124*** -7.085*** -0.748 -1.582 -7.127***
Index 7.030***
Test Critical Values
At 1% -3.568 -4.152 -3.577 -4.165 -2.612 -3.77 -2.615 -3.77
At 5% -2.921 -3.502 -2.925 -3.508 -1.947 -3.19 -1.947 -3.19
At 10% -2.598 -3.18 -2.606 -3.184 -1.947 -2.89 -1.612 -2.89
***, **,* Indicates significance level at 1%, 5% and 10% respectively.

Money Supply is also stationary with trend & intercept at

first difference. GDP is not stationary, neither at level nor at first
difference with intercept and trend & intercept. Further, KSE100 index
and LSE25 index both have been found stationary at first difference
with intercept and trend & intercept. According to ADF-GLS results,
scenario is slightly different. Inflation is the only variable that is
stationary at level with both intercept and trend & intercept. Rest of
the other variables are found stationary at first difference. GDP is
stationary at first difference only with intercept. Moreover, KSE100
index and LSE25 index are stationary at first difference.

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Table.2
Phillips-Perron Test (PP)

At level At first Difference

Trend & Trend &
Variables Intercept Intercept
Intercept Intercept
Panel A
Disco unt Rate -1.586 -1.668 -4.394** -4.351***
-
Money MKT Rate -1.545 -2.002 -10.046***
10.147***
T-Bills Rate -1.416 -1.715 -4.036*** -4.045***
Real Exchange -2.366 -2.564 -5.783*** -5.928***
Rate
Money Supply M2 -2.719* -2.536 -5.333***
Inflation -1.857 -1.957 -3.771*** -3.766**
GDP -0.887 -0.925 -2.091 -2.206
Panel B
KSE100 Index -0.301 -2.128 -5.636*** -5.607***
LSE 25 Index -1.489 -1.605 -7.124** -7.085***
Test Critical Values
At 1% -3.565 -4.148 -3.568 -4.153
At 5% -2.919 -3.500 -2.921 -3.502
At 10% -2.597 -3.179 -2.599 -3.181
***, **,* Indicates significance level at 1%, 5% and 10% respectively.

The above table conferring the results of PP test. The M2 is

stationary at level only with intercept. All other variables are stationary
at first difference with intercept and trend & intercept. M2 is also
stationary at first difference with trend & intercept. Whereas, GDP is
not stationary at level and first difference with both intercept and
trend & intercept. The KSE100 and LSE25 results show that both are
stationary at first difference with intercept and trend & intercept.

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Table.3
NG-Perron Test
MZα MZt MSB MPT
Deterministic terms Deterministic terms Deterministic terms Deterministic terms
Variables c t,c c t,c c t,c c t,c
Ng-Perron at Level
Panel A
Discount Rate -8.089 -9.270 -1.993 -2.106 0.246 0.2 27 3.095 10.018
Money MKT
-4.917 -7.685 -1.560 -1.917 0.317 0.2 49 5.000 11.960
Rate
T-Bills Rate -6.588 -9.870 -1.809 -2.195 0.274 0.2 22 3.736 9.347
Real
Exchange -6.172 -7.694 -1.752 -1.939 0.283 0.2 52 3.983 11.896
Rate
Money Supply
-2.641 -9.329 -1.028 -2.159 0.389 0.2 31 8.795 9.766
M2
- -
Inflation -12.657** -2.513** 0.198** 0.113*** 1.943** 2.791***
37.666*** 4.270***
GDP -1.017 -13.429 -0.490 -2.483 0.482 0.1 85 15.005 7.394
Panel B
KSE100 Index 1 .026 -6.252 0.570 -1.712 0.556 0.2 73 26.399 14.552
LSE 25 Index -1.264 -4.578 -0.607 -1.507 0.480 0.3 29 14.172 19.862.
Ng-Perron at First Differences
Panel A
- -
Discount Rate -21.210** -3.223** 0.147*** 0.151** 1.254*** 4.497**
22.432*** 3.301***
Money MKT - -
-23.070** -3.386** 0.128*** 0.146** 0.976*** 4.009**
Rate 29.358*** 3.786***
- -
T-Bills rate -18.797** -3.006** 0.168*** 0.159** 1.567*** 5.207**
17.225*** 2.895***
Real
- -
Exchange -20.152** -3.149** 0.153*** 0.156** 1.545*** 4.671**
19.965*** 3.068***
Rate
Money Supply - -
-20.397** -3.180** 0.175*** 0.155** 1.734*** 4.547**
M2 14.385*** 2.673***
GDP -9.826** -10.795 -2.024** -2.155 0.206** 0.2 00 3.120** 9.247
Panel B
- - - -
KSE100 Index 0.145*** 0.143*** 1.235*** 3.878***
23.040*** 23.952*** 3.343*** 3.448***
- - - -
LSE 25 Index 0.141*** 0.140*** 0.990*** 3.618***
24.969*** 25.202*** 3.530*** 3.549***
Test Critical Values At
1% -13.8 -23.8 -2 .58 -3.42 0.17 0.14 1.78 4.03
5% -8.1 -17.3 -1 .98 -2.91 0.23 0.17 3.17 5.48
10% -5.7 -14.2 -1 .62 -2.62 0.27 0.18 4.45 6.67
***, **,* Indicates significance level at 1%, 5% and 10% respectively. c means that test is been applied only with
intercept and c,t means that test is been applied considering both trend & intercept.

The above table exhibits results of unit root obtained from

NG-Perron test. As per results of NG-Perr on test, only inflation is
stationary at level with intercept and trend & intercept. All other
variables are stationary with intercept and trend & intercept at first
difference except GDP. GDP is stationary only with intercept at first
difference.

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Table.4
Order of Integration

Variables ADF DF-GLS PP NG-

PERRON
Trend & Trend & Trend & Trend &
Intercept Intercept Intercept Intercept
Intercept Intercept Intercept Intercept

Discount
Rate
D(Discount
I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1)
Rate)
Money
MKT Rate
D(Money
I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1)
MKT Rate)
T-Bills rate
D(T-Bills
I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1)
rate)
Real
Exchange
Rate
D(Real
Exchange I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1)
Rate)
Money
I(0) I(0)
Supply M2
D(Money I(1) I(1) I(1) I(1) I(1) I(1)
Supply M2)
Inflation I(0) I(0) I(0) I(0) I(0) I(0)
D(Inflation) I(1) I(1)
GDP
D(GDP) I(1)
KSE100
Index
D(KSE100 I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1)
Index)
LSE 25
Index
D(LSE 25
I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1)
Index)
A summary of unit root results regarding order of integration

The above table contains the order of integration of all

variables along with KSE100 and LSE25 index. I(0) means that series
is stationary at level and I(1) means that time series is stationary at
first difference. NG-Perron results have been taken into consideration
for further calculations.

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Table.5

Dependent Variable is KSE100 Index selected based on Schwarz

Bayesian Criterion

Regressors Coefficient T-Stats Standard Error Probability

INPT -32.05 -6.529 4.9095 [.000]

Discount Rate -0.524 -3.032 0.172 [.004]

Money MKT Rate -0.006 -0.058 0.112 [.953]

T -Bills rate -0.018 -0.17 0.106 [.865]

Real E xchange Rate 0.124 0.295 0.421 [.769]

Money Supply M2 0.208 2.381 0.087 [.022]

Inflation 0.002 0.05 0.052 [.960]
GDP 4.085 6.568 0.621 [.000]

R-Squared .987 R-Bar Squared .985

D-W statistics 2.275 F-Stat. 411.908

Table.5 contains results of long run co-efficient of

independent variables with KSE100 index. Discount rate, money market
rate and T-bills rate have negative relationship with KSE100 index but
only discount rate is statistically significant. Whereas, real exchange
rate, money supply, inflation and GDP have positive relationship with
KSE100 index but Money supply and GDP are the only variables whose
relationship is statistically significant.

Table.6 contains results of independent variables with LSE25

index. Direction of relationship of independent variables with the LSE25
index is different from the results of KSE100 index. Discount rate and
real exchange rate have negative relationship with LSE25 index but
only discount rate is statistically significant. Whereas, money market
rate, T-bills rate, real exchange rate, money supply, inflation and GDP
have positive relationship with LSE25 index but none of the
independent variables have statistically significant relationship.

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Table.6
Dependent Variable is LSE 25 Index selected based on Schwarz
Bayesian Criterion

Regressors Coefficient T-Stats Standard Error Probability

INPT 4.016 0.002 [.000]

Discount Rate -0.503 -2.31 0.217 [.026]

Money MKT Rate 0.028 0.207 0.137 [.837]

T-Bills Rate 0.033 0.263 0.128 [.794]

Real Exchange Rate -0.322 -0.643 0.500 [.524]

Money Supply M2 0.177 1.646 0.108 [.107]

Inflation 0.002 0.040 0.065 [.968]
GDP 0.452 1.565 0.288 [.125]

R-Squared 0.981 R-Bar Squared 0.977

D-W statistics 2.275 F-Stat. 268.581

Toda Yama Moto Granger Causality

Table.7
Toda-Yamamoto Causality Test
Variables KSE100 LSE 25
Discount Rate
1.3788 0.8919
(0.2403) (0.3450)
Money MKT Rate
0.2565 0.0002
(0.6126) (0.9884)
T-Bills rate 1.3560 1.0699
(0.2442) (0.3010)

Real Exchange Rate

1.6567 0.1420
(0.1981) (0.7063)
Money Supply M2
0.0014 0.1420
(0.9702) (0.7063)
Inflat ion 19.8091*** 17.8544***
(0.0000) (0.0000)
GDP 0.4494 2.4254
(0.5026) (0.1194)
***, indicates signif icance of P-values at 1%, P-values

are available in parenthesis

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Impact of Macroeconomic Indicators on Different . . . Research

Results of uni-directional relationship of independent variables with

KSE100 and LSE25 determined through Toda-Yamamoto causality are
reported in the above table. The probability values of χ2-distribution
are given in parentheses. Only inflation has been found to cause the
KSE100 and LSE25 index. Except inflation, all variables do not cause
the KSE100 and LSE25 index.

Conclusion

In this research, an attempt has been made to drive the relationship

between macro-economic variables with different stock exchange
indices. As far as results of the long run coefficients are concerned,
discount rate is found statistically significant with KSE100 index and
the direction of relationship is opposite. Further, Money supply M2
and GDP have positive and significant relationship with the KSE100
index. On the contrary, in case of LSE25 index, discount rate is the
only variable which is found statically significant and relationship of
discount rate with LSE25 index is opposite as found in case of KSE100.
In case of uni-directional causal relationship, only inflation is causing
both KSE100 and LSE25 index. Therefore, only few macro-economic
variables have an impact on the capital markets. There is a strong
need of better economic policies to maximize benefits from all the
capital marks of Pakistan. Investors should not neglect the changes in
macro-economic variables while making decision of investment in
capital market.

Brown, Durbin Evan (1975), developed CUSUM and CUSUMSQ

test. This testis applied to check the stability of the model. As it
can be seen that plot of all figures are within the bounds, that
shows the stability of model.

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