Macroeconomic Factors and Equity Prices - Pakistan Institute of ...

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Paul and Mallik (2001) explore the long run relationship among macroeconomic factors and equity prices in Australian banking and finance sector by using quarterly data for the period 1980 -98. Multivariate cointegration analysis is performed to investigate the causal and dynamic relationship among consumer price index , interest rates, and seasonally adjusted GDP and ASX Banking and Finance Index by using autoregressive distributed lag (ARDL) model proposed by Pesaran and Shin (1995)and reveal that interest rate has a significant negative effect on equity prices and GDP growth has a significant a positive effect on the equity prices of banking and finance sector. However, no significant effect of inflation is observed on equity prices. Fazal and Mahmood (2001) explore causal relationship between equity prices and economic activity, investment spending, and consumption expenditure for the period 7/1959 to 6/99 by employing cointegration analysis and VECM and provide evidence about existence of long run relationship among above stated variables. Unidirectional causality has also been found flowing from macro variables to equity prices. However it is observed Pakistani equity in unable to influence aggregate demand. Fazal(2006) again examines relationship to investigate the stochastic properties of the variables by considering the shifts as a result of economic liberalization and finds unidirectional causality between the real sector and equity prices. No significant change in patterns is observed Maysami et al (2004) examines the long run relationship among macroeconomic variables and STI and sectoral indices like the property index, finance index and the hotel index and finds STI and the property index have long term relationship with industrial production, inflation , exchange rate , changes in the short and long-term interest rates and money supply. Theoretical and empirical research on relationship between inflation and equity prices shows mixed results. Literature supports the evidence that positive relationship between nominal stock returns and inflation over the long horizons. Kessal (1956) concludes that unexpected inflation increases the firm’s equity value if the firm is net debtor Some more studies that find positive relationship between inflation and equity prices include Firth(1979), Gultekin(1983), Boudhouch and Richarson(1993). More recently Ioannidis et al. (2004) finds evidence about existence of positive relation between inflation and equity market returns in Greece for the period 1985 -2003. Empirical Literature also offers evidence about existence of negative relationship between nominal equity prices and inflation in long run. Fama (1981) finds that there is negative association between equity market returns and inflation. Spyrou (2001) finds
evidence about presence of negative correlation between equity market returns and the inflation in Greece for the period 1990 -1995. Similarly, some studies established mixed results about the relationship between stock market returns and inflation. Mark (2001) finds the mixed empirical evidence about relationship between equity market returns and inflation. Amidhud (1996) reports the presence of negative correlations between equity prices and inflation in short run which is followed by positive association in the long run. Akmal (2007) investigate the relationship between stock returns and inflation for the Pakistani equity market for the period 1971-2006 by employing autoregressive distribution lag approach. Findings of study indicate that stocks are hedges against inflationary pressures (inflation) in long run and this relationship is statistically significant at α=0.10 Chan, Chen and Hsieh (1985), Chen, Roll and Ross (1986), Burnmeister and Wall (1986), Burmeister and MacElroy (1988), Chang and Pinegar (1990), Defina (1991) Kryzanowski and Zhang (1992), Chen and Jordan (1993), Sauer(1994), Rahman, Coggin and Lee (1998) also explore the relationship among inflation and equity market returns. Similarly, Beenstock and Chan (1988), Sauer (1994) explore the relationship among money supply and equity market returns. Shahid (2008) explores causal relationships among equity prices and industrial production, money supply , exports, exchange rate , foreign direct investment and interest rates for the period 3/95 to 3/2007 by employing cointegration analysis and Toda and Yamamoto Granger causality test on quarterly data. Short run relationships among variables have also been investigated by using Bivariate Vector Autoregressive Model for variance decomposition and impulse response functions. The study concludes that equity prices in India lead economic activity in general. However, Interest rate is found to lead the equity prices. Therefore no significant study is present with reference to Pakistan that considers broader set of variables and long term data. This study fills this gap and explores relationship between equity prices and macroeconomic factors. 3. Data Description and Methodology This study explores the long term causal relationship among macro economic variables and Pakistani capital market for the period 6/1998 to 6/2008 by using monthly data. The macroeconomic variables include Industrial Production Index, Broad Money, Oil Prices, Foreign Exchange Rate, Inflation and Interest Rate. Monthly time series has been chosen as it is
Page 1 and 2: Macroeconomic Factors and Equity Pr
Page 3: among equity prices and a broader p
Page 7 and 8: Oil Prices Brent oil prices have be
Page 9 and 10: The second stage is to estimate the
Page 11 and 12: Table 2(a) Statistics for Selecting
Page 13 and 14: and Koh (2000). The possible reason
Page 15 and 16: 5. Conclusion This study examine th
Page 17 and 18: DeFina, R.H., (1991), “Does Infla

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