Macroeconomic Factors and Equity Prices - Pakistan Institute of ...
Macroeconomic Factors and Equity Prices - Pakistan Institute of ...
Macroeconomic Factors and Equity Prices - Pakistan Institute of ...
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Paul <strong>and</strong> Mallik (2001) explore the long run relationship among macroeconomic factors <strong>and</strong><br />
equity prices in Australian banking <strong>and</strong> finance sector by using quarterly data for the period<br />
1980 -98. Multivariate cointegration analysis is performed to investigate the causal <strong>and</strong> dynamic<br />
relationship among consumer price index , interest rates, <strong>and</strong> seasonally adjusted GDP <strong>and</strong> ASX<br />
Banking <strong>and</strong> Finance Index by using autoregressive distributed lag (ARDL) model proposed by<br />
Pesaran <strong>and</strong> Shin (1995)<strong>and</strong> reveal that interest rate has a significant negative effect on equity<br />
prices <strong>and</strong> GDP growth has a significant a positive effect on the equity prices <strong>of</strong> banking <strong>and</strong><br />
finance sector. However, no significant effect <strong>of</strong> inflation is observed on equity prices.<br />
Fazal <strong>and</strong> Mahmood (2001) explore causal relationship between equity prices <strong>and</strong> economic<br />
activity, investment spending, <strong>and</strong> consumption expenditure for the period 7/1959 to 6/99 by<br />
employing cointegration analysis <strong>and</strong> VECM <strong>and</strong> provide evidence about existence <strong>of</strong> long run<br />
relationship among above stated variables. Unidirectional causality has also been found flowing<br />
from macro variables to equity prices. However it is observed <strong>Pakistan</strong>i equity in unable to<br />
influence aggregate dem<strong>and</strong>. Fazal(2006) again examines relationship to investigate the<br />
stochastic properties <strong>of</strong> the variables by considering the shifts as a result <strong>of</strong> economic<br />
liberalization <strong>and</strong> finds unidirectional causality between the real sector <strong>and</strong> equity prices. No<br />
significant change in patterns is observed<br />
Maysami et al (2004) examines the long run relationship among macroeconomic variables <strong>and</strong><br />
STI <strong>and</strong> sectoral indices like the property index, finance index <strong>and</strong> the hotel index <strong>and</strong> finds STI<br />
<strong>and</strong> the property index have long term relationship with industrial production, inflation ,<br />
exchange rate , changes in the short <strong>and</strong> long-term interest rates <strong>and</strong> money supply.<br />
Theoretical <strong>and</strong> empirical research on relationship between inflation <strong>and</strong> equity prices shows<br />
mixed results. Literature supports the evidence that positive relationship between nominal stock<br />
returns <strong>and</strong> inflation over the long horizons. Kessal (1956) concludes that unexpected inflation<br />
increases the firm’s equity value if the firm is net debtor Some more studies that find positive<br />
relationship between inflation <strong>and</strong> equity prices include Firth(1979), Gultekin(1983),<br />
Boudhouch <strong>and</strong> Richarson(1993). More recently Ioannidis et al. (2004) finds evidence about<br />
existence <strong>of</strong> positive relation between inflation <strong>and</strong> equity market returns in Greece for the<br />
period 1985 -2003. Empirical Literature also <strong>of</strong>fers evidence about existence <strong>of</strong> negative<br />
relationship between nominal equity prices <strong>and</strong> inflation in long run. Fama (1981) finds that<br />
there is negative association between equity market returns <strong>and</strong> inflation. Spyrou (2001) finds
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