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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Oil <strong>Prices</strong><br />
Brent oil prices have been used as proxy for oil prices. Increase in oil prices increase the cost <strong>of</strong><br />
production <strong>and</strong> decrease the earning <strong>of</strong> the corporate sector due to decrease in pr<strong>of</strong>it margins or<br />
decrease in dem<strong>and</strong> <strong>of</strong> product so oil prices are negatively related to equity prices. However, for<br />
oil <strong>and</strong> gas sector increase in oil prices increase the corporate revenues <strong>and</strong> pr<strong>of</strong>its so oil prices<br />
are positively related to equity prices. It is hypothesized that an increase in oil rates is negatively<br />
related to equity market returns<br />
Foreign Exchange Rate<br />
This study employs foreign exchange rate as end <strong>of</strong> month US$/Rs exchange rate It is<br />
hypothesized that depreciation in home currency is negatively related to equity prices.<br />
T Bill Rate<br />
Treasury bill rates have been used as proxy <strong>of</strong> Interest rate. Increase in interest rates leads to<br />
increase in discount rate <strong>and</strong> it ultimately results in decrease in present value <strong>of</strong> future cash flows<br />
which represent fair intrinsic value <strong>of</strong> shares. Therefore, it is hypothesized that an increase in<br />
interest rate is negatively related to equity market returns<br />
Foreign Portfolio Investment<br />
Foreign portfolio Investment has been used as proxy <strong>of</strong> Investor confidence. Foreign portfolio<br />
investment increases liquidity in market <strong>and</strong> higher dem<strong>and</strong> leads to increase in market prices <strong>of</strong><br />
shares so it is hypothesized that an increase in foreign portfolio investment is positively related<br />
to equity market returns<br />
Methodology<br />
To examine the relationship among macroeconomic factors <strong>and</strong> equity market returns following<br />
model has been tested<br />
Ln I t = β0+ β 1 LnIPI t + β 2 lnOil t + β 3 lnXRate t + β 4 TBill t + β 4 CPI t + β 4 FPI t + β 4 M1 t µ t<br />
Where<br />
I= KSE -100 Index<br />
Oil = Oil prices in $