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Impact of macroeconomic factors on stock returns 1
Chapter # 1
Introduction
Impact of macroeconomic factors on stock returns 2
1.1 Introduction
Investigating the impact of macroeconomic factors on s...
Impact of macroeconomic factors on stock returns 3
theoretical concept and practical facts about the economic variables an...
Impact of macroeconomic factors on stock returns 4
1.3 Researchquestion
 What are the effects of macroeconomic factors on...
Impact of macroeconomic factors on stock returns 5
The several other models like EGARCH, GARCH, ADRL, DBEKK, VAR
and VECM ...
Impact of macroeconomic factors on stock returns 6
Chapter # 2
Review of Related
Literature
Impact of macroeconomic factors on stock returns 7
2.1 Theoretical background
2.1.1 Financial market
Financial market tell...
Impact of macroeconomic factors on stock returns 8
investment. So, a large company’s shares are purchased by different inv...
Impact of macroeconomic factors on stock returns 9
Beside these, overall result also illustrate that there is co-integrati...
Impact of macroeconomic factors on stock returns 10
Price Index by using data from January 1997 to 2010.A key thing consid...
Impact of macroeconomic factors on stock returns 11
market performance as a rate of gross domestic product would be growin...
Impact of macroeconomic factors on stock returns 12
Their findings were that DSCHG, UPCHG and change in OILP, out of the e...
Impact of macroeconomic factors on stock returns 13
Haque and Sarwar (2012) investigate the relation between stock returns...
Impact of macroeconomic factors on stock returns 14
know most recent oil prices. The study uses the rising markets which a...
Impact of macroeconomic factors on stock returns 15
variables concerning international activities. Variable concerning pri...
Impact of macroeconomic factors on stock returns 16
Additionally, exchange and interest rates could be used to forecast th...
Impact of macroeconomic factors on stock returns 17
unemployment and stock return also show the positive connection which ...
Impact of macroeconomic factors on stock returns 18
Treasury bill rate (TB) as well as exchange rate (ER). The research wa...
Impact of macroeconomic factors on stock returns 19
Benakovic and Posedal (2010) investigate the stock returns that were g...
Impact of macroeconomic factors on stock returns 20
recommended that to increase the returns and stock trading activities ...
Impact of macroeconomic factors on stock returns 21
technique were used and Results specify that there is no serial correl...
Impact of macroeconomic factors on stock returns 22
GARCH (1, 1) model is used, one hand it is checked with and without in...
Impact of macroeconomic factors on stock returns 23
industrial production, exchange rate, inflation and money supply have ...
Impact of macroeconomic factors on stock returns 24
Chapter # 3
Methodology
Impact of macroeconomic factors on stock returns 25
3.1 Researchapproach
In this research, quantitative research approach ...
Impact of macroeconomic factors on stock returns 26
3.5 Sample size and period
In this study, the data of Karachi Stock Ex...
Impact of macroeconomic factors on stock returns 27
3.9 Variable description
Following are the variables of this study.
3....
Impact of macroeconomic factors on stock returns 28
Chapter # 4
Data Analysis
Impact of macroeconomic factors on stock returns 29
4.1 Introduction
The core rationale of this paper is to scrutinize the...
Impact of macroeconomic factors on stock returns 30
The third factor is exchange rate (ER) which is dollar into rupee. Thi...
Impact of macroeconomic factors on stock returns 31
Adjusted R square elucidate the accurateness in the stock returns, tha...
Impact of macroeconomic factors on stock returns 32
Coefficient of discount rate is 1.247192 that shows that the one unit ...
Impact of macroeconomic factors on stock returns 33
Coefficient of oil prices is -2.286445 that mean one unit increase in ...
Impact of macroeconomic factors on stock returns 34
Chapter # 5
Conclusion and
Recommendations
Impact of macroeconomic factors on stock returns 35
5.1 Conclusion
In the current literature, the relationship among macro...
Impact of macroeconomic factors on stock returns 36
negative relationship of OP with stock returns but , (Benakovic & Pose...
Impact of macroeconomic factors on stock returns 37
foreign companies to do FDI in the country, the law and order situatio...
Impact of macroeconomic factors on stock returns 38
Chapter # 6
Bibliography
Impact of macroeconomic factors on stock returns 39
ACKNOWLEDGEMENT
We are to be grateful for the small things in life, th...
Impact of macroeconomic factors on stock returns 40
TABLE OF CONTENTS
Acknowledgement .......................................
Impact of macroeconomic factors on stock returns 41
3.9.1 Stock returns .....................................................
Impact of macroeconomic factors on stock returns 42
Abstract
This paper explores the relationship between Karachi Stock Ex...
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Impact of macroeconomic variables on stock returns

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Impact of macroeconomic variables on stock returns

  1. 1. Impact of macroeconomic factors on stock returns 1 Chapter # 1 Introduction
  2. 2. Impact of macroeconomic factors on stock returns 2 1.1 Introduction Investigating the impact of macroeconomic factors on stock returns is one of the most important areas of finance. Many studies have been conducted to find out the influence which different factors can make on the stock returns including macroeconomic variables. In this study, we have selected different variables i.e. exchange rate, interest rate, oil prices, GDP, and FDI. Basically, while talking about the small economies, stock market can play a vital role in organizing economic resources within the country as well as outside the country to achieve better economic condition. Because it is the market from which funds flows from individuals and corporations across the globe to the investors exist in an economy. GDP is a primary measure; it is the money value of services and goods produced with in a country in a certain period. Exchange rate is the rate at which one currency can be exchanged for another while the FDI is also an important source for economic development. The discount rate is also a key variable of the economy and oil price plays significant role in economy. It is commonly believe that when macroeconomic variables fluctuate then it also increases or decreases the returns of stock. As Chen, Agrusa, Krumwied and Lu (2012) argue in their study that returns are influenced by the change in stock prices and several macroeconomic variables. However, there are certain economic variables which have strong or medium relationship with stock returns. Investors here look for an accurate valuation of returns of their investment so they can earn maximum profit. On the other hand the study will also useful for the planners, they can create more opportunity to earn in a stock market after acknowledge that what variables have what directions of effecting to returns. This study also can answer the gap between
  3. 3. Impact of macroeconomic factors on stock returns 3 theoretical concept and practical facts about the economic variables and stock returns behavior. 1.2 Statement of problem The stock Market return is one of the most important topics in the recent times around the globe. Many studies have been in the recent years to find out the factors, which affect the stock returns. The studis on individual exchanges like Istanbul Stock Exchange (ISE) (Rjoub, Türsoy & Günsel, 2009), Karachi Stock Exchange(KSE) Nazir, Nawaz, Anwar and Ahmed (2010a); Zafar, Urooj and Durani, 2008; Iqbal and Javed (2012); Haque and Sarwar (2012), also on the multi exchanges like India and China’s stock market index (Hosseini, Ahmad, & Lai,2011) USA, UK, Canada and Australia (Karunanayake, Valadkhani, & O'Brien, 2012) and many more with the number of different factors including several macroeconomic factors are examined in the recent past. So finding out the impact of the macro economic factors is important for both the investors and financial analysts as to estimate the price and ROI. So there is a need to fulfill the knowledge gap in the Pakistani financial sector. As Özlen Ergun (2012) said “Developed countries’ financial markets are observed to be more explained compared to the other financial markets. Therefore, the research is needed in order to improve investment decisions by maximizing the expected value of stock returns in developing economies” (p. 315) for the better insight of the Pakistani as well and the foreign investors along with the policy makers to develop the strategy for improving the investment in the stock market.
  4. 4. Impact of macroeconomic factors on stock returns 4 1.3 Researchquestion  What are the effects of macroeconomic factors on stock returns in Pakistani stock market? 1.4 Objective of the study The objective of this work is to improve the current knowledge associated with the influence of the several macroeconomic factors on the stock market returns in the Pakistani context and to examine the relationship of these specific factors with the stock returns. Furthermore the study tries to find out the empirical evidence of this relationship. 1.5 Significance ofthe study This study helps the investors for knowing the better inside of the impact of macro-economic factors on stock returns. It also provides them, current knowledge of the stocks returns. With the help of that study we can find the relationship between the different factors of macro-economic with the stock return and also present that which factor has more impact than another factor. Similarly, by knowing the impact of macroeconomic factors on stock, investor’s capabilities will be enhanced which helps in improving decision making. 1.6 Limitation and delimitation of the study The research is limited to available data from 1960 to 2010 of Karachi Stock Exchange (KSE) only. Variables are also limited that researchers analyze some variables like inflation, interest rate, exchange rate, gross domestic product (GDP), oil prices and foreign direct investment (FDI) due to shortage of time and budget. Research is also limited to regression method.
  5. 5. Impact of macroeconomic factors on stock returns 5 The several other models like EGARCH, GARCH, ADRL, DBEKK, VAR and VECM can be used to delimit the study. However, more data can be analyzed to get the better insight. In this regard, the data of Islamabad stock exchange (ISE) and Lahore stock exchange (LSE) can be used. In addition, the more variables like money supply (M1 & M2), gross national product (GNP), unemployment, budget deficit, discount rate etc. can be the delimitation of the study.
  6. 6. Impact of macroeconomic factors on stock returns 6 Chapter # 2 Review of Related Literature
  7. 7. Impact of macroeconomic factors on stock returns 7 2.1 Theoretical background 2.1.1 Financial market Financial market tells about a platform where sellers and purchasers do their business collectively. This market makes a difference in detail whereas the highlighted differences are way of trading of shares, types of shares as well as who are the dealers. Transactions are made like other market but the products are different in this market that is shares and debt (Ross, Westerfield, & Jordan, 2001). 2.1.2 Primary versus secondary markets There are two functions of financial market: primary market function and secondary market function. Secondary market come into exist if there is any primary market. In primary market corporations as well as government sells the securities in other words first time they issue. When, these securities are sold again in the market that market is called secondary market. Government just issues the debt securities however corporations can issue debt securities as well as equity securities (Ross, et al., 2001). 2.1.3 Stock market The market as discussed before, where the securities are resale issued by the various corporations. This is the market that financial managers are more concern about and keep focus on. On the other side this is the market where the value of any securities of corporation fluctuates and decided. Usually, in every country there are stock markets according to its cities just like in Pakistan Karachi stock exchange, Islamabad stock exchange, Lahore stock exchange. In India: Mumbai stock exchange, in Nigeria: Nigeria stock exchange. Many investors invest with the portfolio
  8. 8. Impact of macroeconomic factors on stock returns 8 investment. So, a large company’s shares are purchased by different investors that exceeds from 50 percentages of issued shares that company become a public company (Brigham & Houston, 2009). 2.1.4 Stock market returns The investors who invested in the market they know that there is some expected return of their investment from the stock market. The returns, an investor get from the market by investing in shares, is called stock market returns. When investor analyses the return of stock, the return cannot be predetermined. The returns depend upon the firms profit on the other hand profit and returns also depend upon many factors i.e. macroeconomic variables: inflation, interest rate, GDP etc. that describe the relationship and impact of multi factors of macroeconomic on returns (Brigham & Houston, 2009). 2.2 Empirical studies Kpanie and Vivian (2014) have conducted the research of Ghana stock market with the selected variables of macroeconomics under the umbrella of ADF co- integration analysis and error correction model. The data was collected on quarterly basis. Selected variables were analyzed in which Money supply (MS), Treasury bills (TB) (for interest rate proxy), inflation rate (INF), Exchange rate (ER) and oil prices (OP) were included. Research findings acknowledge that OP and MS are significant with respect to Ghana stock market by 1%. The research findings also show that there are long term relationship among the Ghana stock market and some of the independent variables. Further interest rate (TB), ER and INF show the negative relationship with respect to Ghana stock market at both lagged. However, MS has negative relationship at first lagged and significant positive on the second lagged.
  9. 9. Impact of macroeconomic factors on stock returns 9 Beside these, overall result also illustrate that there is co-integration among the all independent variables. Ullah, Hussain and Rau (2014) scrutinize the impacts of macro-economy on stock market by scrutinizing the data from January 2008 to December 2012. Exchange Rate (ER), Interest Rate (IR) and Inflation (Inf) has been considered in the study while the Bound Test Approach has been used in it. The results show that stock market of Pakistan has been negatively influenced by both the Exchange and Interest Rate while the Inflation doesn’t have noteworthy impact on stock market. They suggest that the government should closely monitor and use the Exchange and Interest Rate to boost the Stock Market’s performance. Chang (2013) investigated about whether there is any hedge against inflation or not within the context of Japanese stock market. For this study, he used ADL bounds test. Ten years of data has been used which is 2001M1 to 2011M7. On the other hand one more study is investigated which is granger causality between inflation and stock market returns. Japan is one of those countries who believe and lead people that inflation is advantageous to the stock market. Many studies conducted on relationship between inflation and stock returns. Most of them result that there is positive relationship and approve the Fisher’s hypothesis where as some of the study result the negative relationship. In last the result determines that there is inverse and long term relationship of stock returns with inflation. While in the short term, the change in stock return because of the inflation rate can be controlled within the three months and can be constant more. Ibrahim and Agbaje (2013) study the long-run relationships and dynamic connections amid stock returns and inflation in Nigeria by using monthly data of all share price index from Nigerian Stock Exchange (NSE) and Nigerian Consumers
  10. 10. Impact of macroeconomic factors on stock returns 10 Price Index by using data from January 1997 to 2010.A key thing consider in this study is capital market stock that is The Stock market. Buying and selling of listed stock in Nigeria is done in Nigerian Stock Exchange (NSE). Listed stocks in Nigeria are trade on floor of the Nigerian Stock Exchange (NSE) whereas Securities and Exchange Commission (SEC) is supreme regulatory and supervise activities and dealings of the foremost players on floor of Stock Exchange. Variables used for the study; are stock return, co-integration, and inflation also includes Nigerian Stock Exchange (NSE). The study uses the analytical technique which was proposed by Pesaran and Pesaran (as cited in Ibrahim & Agbaje, 2013) Autoregressive Distributed Lag (ARDL) for co-integration and to know relationship between other variables researchers give estimation model in which one is represent all share indexes (ASI) and other is for consumer price indexes (CPI). Results indicate that both ASI and CPI are co-integrated and there is long run relationship among inflation and stock returns, projected coefficient of inflation have important and positive impact on stock and casual relationship in-between inflation and stock returns. This study also verifies a Fisherian hypothesis and declared a positive result of inflation on stock returns. Zafar (2013) investigated the performance of stock market determinants through macroeconomic variables for Pakistan. The data of 20 years, 1988 to 2008, was used. The institutional variables were not examined because absence of precise data that is why macroeconomic factors were used which are: domestic credit issued by banking sector, real interest rate, value traded and foreign direct investment as a rate of gross domestic product. Quantitative technique was used by regression. The outcomes are not conflicting with academic extrapolations which show that there is strong positive linkage among FDI and stock market performance. Stock
  11. 11. Impact of macroeconomic factors on stock returns 11 market performance as a rate of gross domestic product would be growing by 6.78% if the FDI as a rate of gross domestic product grow by 1%. On the other hand real interest rate and stock market show adequate negative linkage. The condition is that stock market performance as a rate of gross domestic product declines by 1.218% if the real interest rate as a rate of gross domestic product grows by 1%. Further there is a progressive moderate linkage among stock market performance and value traded as a rate of gross domestic product. In last, stock market have insignificant relationship with intermediaries. Chen et al. (2012) analyze the effect of eight macroeconomics variables in the context of Japan’s hotel stock returns. The variables are changes in discount rate (DSCHG), consumer price index (CPI), money supply (MS), unemployment rate (UP), and industrial production (IP), but these are the variables which are usually studied by different authors. Chen et.al further added three more variables which are yen-dollar exchange rate (EXCH), change in oil price (OILP) and total trade (TTR). For the research six companies of Japan have been selected with 30 years of data from January 1976 till June 2006 about stock prices. Returns are influence if there is a change in stock market value and several macroeconomic variables. Chen et.al look at study which is conducted in Taiwan that shows only changes in unemployment rate and growth rate of money supply can be the determinants of hotel stock returns. Beside that Chen et.al also investigate that what relation exist between macroeconomics variables and stock return in a developed country through vector auto regression (VAR) model. The hypotheses were that DR, UP, CPI and OILP have a significant and negative impact on hotel stock returns whereas MS, IP, EXCH and TTR have a significant but positive impact. Chen et.al used the Granger causality procedure based on VAR model to find the result.
  12. 12. Impact of macroeconomic factors on stock returns 12 Their findings were that DSCHG, UPCHG and change in OILP, out of the eight variables, can significantly cause the hotel stock returns in Japan on the other hand DSCHG, growth rate of MS, change in OILP and change in TTR can Granger cause the market returns. Hence, there are two variables which are common in both returns that are DSCHG and change in OILP (Chen et. al, 2012). Hassan and Rifai (2012) focus on the study that if there is any effect of macro- economic factors on equity returns in both underdeveloped and developed stock market. They see the long term relationship among equity return and macroeconomics variables in Jordan. General to specific (GETS) and Autoregressive distributed lag (ARDL) both are used to specify the results. There are several researches that have been examined the relationship among the economics activities and stock market returns. In a study researcher conclude that stock market is influence by interest rates, inflation rates, industrial production and bond yield spreads. The study is investigated for the role of economic activities on emerging stock market in Jordan especially concerning oil price impact. The hypothesis of the study is a linkage among the Jordanian stock market and several economic activities and the point of departure is to search the long and short term linkage among Jordanian stock market and macroeconomic factors. There are many economic variables which are allied to business cycles that can impact the risk and return of stock market. The result of the study show that money supply, foreign exchange reserves, oil prices and trade surplus are the factors of macroeconomics that influenced the Jordanian stock market. Hassan and Rifai (2012) put forward that there is positive relation of money supply and stock market, further concluded that stock market will result in negative if there is increment in the price of oil.
  13. 13. Impact of macroeconomic factors on stock returns 13 Haque and Sarwar (2012) investigate the relation between stock returns and macro-determinants on equity returns. For this they consider the data from the period 1998 to 2009 which includes 394 companies listed in the Karachi Stock Exchange (KSE). Gross domestic product (GDP), money supply, inflation, consumer price index, volatility, budget deficit and interest rate were considered as variables. The data was collected from the KSE reports, publications of federal bureau of statistics, bulletins of state bank of Pakistan and business recorder. Panel data specification test is applied to test the relationship. A regression equation is estimated to find out the effect of macro-determinants on equity returns. The results confirmed a strong association between equity returns and variables. The result shows that volatility and gross domestic product are significant positive while interest rate, budget deficit, money supply, consumer price index and money supply are negatively related. The results of this study will benefit people like portfolio manager, policy makers and other concerned people while inspecting the stocks. Iqbal and Javed (2012) investigate issue for a rising market that is Pakistan. A main purpose of study is to give practical proof that macroeconomics variables can help to predict instability of stock in case of local as well as international market. The research focuses on daily data along with monthly from stock market index KSE- 100 and other is obtain from yahoo finance which is S&P- 500. Eleven years data used as a data sample in which macro data of Pakistan are excluded like call money rate, money-stock, consumer prices and exchange-rate because their current data equal to July 2010. International Financial Statistics is used to get Pakistani macroeconomics data. To get recent US macro data researcher access the economics research division from website of Federal Reserve Bank of St. Louis and same source use to
  14. 14. Impact of macroeconomic factors on stock returns 14 know most recent oil prices. The study uses the rising markets which are characterize through superior instability, also superior related profit compare with develop market. Results indicate that business and international macro-economic condition can be affected through instability of rising market. Central role played by stock price volatility in decision making of both financial and economics. Result also shows, in Pakistani market investor decrease the risk at the time of increase in oil prices and when level of activity in foreign market is high. Karunanayake et al. (2012) investigate the interplay among stock market returns and GDP growth rate by analyzing the data from 1959 to 2010 on quarterly basis and a multivariate GARCH model on four countries i.e. USA, UK, Canada and Australia. He argued that the US economy influences all the three economies as it is the strongest. In this study they examine the interdependency of stock market returns and real GDP in the three continents. They further added that because of globalization, it is very important to understand and determine the cross-country interactions from the aspect of investor and policy maker. In this study, they use the diagonal version of DBEKK. The DBEKK model is widely used especially for the purpose that it reduces the number of parameters as well as it guarantees the positive definite of variance. The results pointed out that the quarterly mean and mean GDP growth rates of all four stock exchanges are positive. Also it is found out that the US stock exchange is the least volatile and the Australian stock exchange demonstrates the highest volatility. The results also show that the stock return series of the four countries are negatively skewed (Karunanayake et al., 2012). Nopphon (2012) analyzes the macro-variables and stock returns considering variables that are categorized into four groups that are factors regarding the price level, monetary policy and interest rates, variables reflecting economic conditions and
  15. 15. Impact of macroeconomic factors on stock returns 15 variables concerning international activities. Variable concerning price level includes oil prices and etc., variables concerning international activities includes FDI and ER, while the variables concerning economic conditions include industrial production index and employment level. This paper investigates that different techniques have been used to identify the results of those relationships that are regression models, GARCH family model and the volatility clustering, dynamic model and long run relationships and event studies. The regression equation is the most standard technique to test the relationship in which an equation is used. Numerous studies show that there is linkage between the macro-variable factors and stock returns. But the results of these studies are not directly comparable as they all applied different techniques and methods. Current results are mix, as some studies show that these variables can describe future returns, while the other studies show the reverse case. Özlen and Ergun (2012) explore the effects of Macroeconomic Factors on Stock Returns, the data of February, 2005 to May, 2012 has been extracted from Turkish Central Bank, websites of ISE and Turkish Statistical Institute to examine the stock returns of 45 listed corporations from 11 different sectors. They use five variables Unemployment rate, exchange rate, interest rate, current account deficit and inflation. They choose Autoregressive distributed lag method to test these variables. Results indicate that most significant determinants of stock return are exchange and interest rate regardless of the type of companies and impact all the sectors or the economy constantly and industry respond significantly on the changers occurred in exchange rate and interest rate. Hence it is suggested policy makers of the economy could carefully do changes in interest and exchange rate because it plays critical role to control the hazard of recession and financial crises in the economy.
  16. 16. Impact of macroeconomic factors on stock returns 16 Additionally, exchange and interest rates could be used to forecast the company’s stock returns. Samadi et al. (2012) study the linkage between macro-variables and stock returns of Tehran Stock Market through the use of monthly data of stock returns index including all the listed companies in Tehran Stock Exchange in the period of April 1999 to the July 2011. The inflation, exchange rates, liquidity, oil price and world gold prices are considered as a key variable. The study uses the GARCH model and Results reveal the inflation, foreign exchange rate and gold price have significant relationship with the stock return while liquidity and oil price have no such impact on stock return consequently it is recommended that at macro level the policy maker should consider the impact of these variables on indexes of stock and other financial markets while making monetary and financial policies. Zhu (2012) research a study to see the influence of macroeconomic variables on stock returns. The energy division is concerned of (SEE) Shingai stock market. Variables are industrial production, money supply (M2), unemployment rate, imports, exports, bond, inflation rate and exchange rate. Six years of data from 2005 to 2011collected from National Bureau of Statistics and People’s Bank of China. To display the energy sector the data are chosen from SEE. The results substantiate the hypothesis in which there is positive linkage among exchange rate and stock returns, Chinese money (CNY) is decline compared to US dollar if the energy sector’s stock return grows. However, there is negative linkage among stock returns and exports that show each time exports grow if industry’s stock return declines. Further finding shows the positive link of stock return and foreign reserve that define foreign reserve increases at the same time stock return of the industry will also increases. The relation of
  17. 17. Impact of macroeconomic factors on stock returns 17 unemployment and stock return also show the positive connection which also acknowledge that if stock return grows of the industry there will be also a positive change in unemployment rate. Hosseini et al. (2011) examine the impact of macroeconomic variables on India and China’s stock market index. Four variables were taken in this study i.e. inflation rate, money supply, crude oil price and industrial production. The data from the year January 1999-January 2009 was taken. The article specifically focuses the stock market fluctuations of developing countries rather than developed countries like in past the studies were mostly conducted on developed countries. By understanding the linkage among these factors and capital market, it will be very helpful for the investors to diversify their risk by investing in different countries. Different tests are performed for testing the hypothesis in which unit root test; multivariate co-integration test and vector error correction model are included. After the testing, the results show that there is a connection between these factors and stock market index in both countries, in long and short run. In long run in china, money supply, inflation and crude oil price show positive relationship while in India industrial production and inflation shows positive impact. In short run, china’s stock market shows positive relation with money supply and inflation rate, while India’s stock market shows positive impact with crude oil. These relationships help investors in their decision making so that they have knowledge of different economies (Hosseini et.al, 2011). Kuwornu and Owusu-Nantwi (2011) conducted the research among the relationship of stock market returns with the particular variables of macroeconomics. Sample size for this research was from 1992 to 2008 monthly. Selected variables for the study were Consumer Price Index (CPI); Crude oil prices (OP), ninety one day
  18. 18. Impact of macroeconomic factors on stock returns 18 Treasury bill rate (TB) as well as exchange rate (ER). The research was carried out in the context of Ghana by using the method of Full Information Maximum Likelihood Estimation. Results revealed that ER and TB have significantly negative relationship with the stock returns in Ghana, while the CPI which used as a proxy of inflation shows the significant positive relationship. However, OP was the only variable which volatility did not make any significant changes on stock returns of Ghana. Singh, Mehta, and Varsha, (2011) scrutinizes the relation of stock price and the macroeconomic variables. This study takes place in Taiwan to inspect the casual connection between index returns and certain key macroeconomic variables such as GDP, employment rate, inflation, money supply and exchange rate. Interestingly, this investigation is based on stock portfolio rather than stocks. Four areas have been observed while this examination P/E ratio, market capitalization, PBR and yield. The data was taken from Taiwan’s Stock Exchange where 50 companies were listed. The data from the year 2003 to 2008 was taken from Taiwan’s stock exchange’s website. Firstly, the companies were grouped as small, medium and big companies based on market capitalization. Secondly three portfolios were made on the basis of P/E ratio, PBR and yield. Linear regression was estimated. Exchange rates impacts portfolios positively. The findings of this study demonstrates that except the PBR, GDP and exchange rates affects all the portfolios return of small companies, on the other hand, money supply and employment rate don’t significantly affect the stock returns. It is worth noticing that the effects of equity financing are positive. These findings are noteworthy from the point of view of companies as well as investors. From the results of this study, the investors and decision makers can develop gainful investment according to changes in variables (Singh et al., 2011).
  19. 19. Impact of macroeconomic factors on stock returns 19 Benakovic and Posedal (2010) investigate the stock returns that were given on fourteen stocks of the Croatian stock market. The data was taken from January 2004- October 2009 and the factors that were considered are interest rates, market index, oil prices, inflation and industrial production. The analysis contains both, the fourteen stocks and sensitivity to factors was predicted. The multiple regression and cross sectional regression model was used to estimate the sensitivity of the stocks. The findings of the study shows that oil prices, industrial production and the exchange rate are positively related to stock returns while the inflation has negatively impact the stock return. In cross-sectional regression the sensitivities were taken as independent while stock returns as dependent. The factor that affects stock prices the most was market index which is positively related to the risk premium, while the other variables were not significant. Nazir, Khalid, Shakeel and Ali (2010) examine the impact of macro factors on the returns of stock market by analyzing 216 monthly observations from January 1991 to December 2008; the stock returns are measured by all share indexes data of KSE while the interest rate, exchange rate, inflation rate, GNP per capita, are considered along with the political competition, types of institution and level of democracy and autocracy phenomenon in Pakistan. The Exponential Generalized Auto Regressive Conditional Heteroskedasticity (EGARCH) technique were used to find out the relationship among these variables and it validates the previous finding that the stock returns volatility or performance has inverse relationship with the inflation rate, interbank interest rate , and exchange rate. Furthermore interest rate has greater impact in this volatility. On the other hand, per capita income has a direct relationship with the stock returns because it persuades people to save and invests in stock market. They
  20. 20. Impact of macroeconomic factors on stock returns 20 recommended that to increase the returns and stock trading activities of equity market of Pakistan the government should take the corrective actions to control the inflation and interest rate. In addition, potential effect on the returns of stock market ought to be forecasted by the regulator during devaluation of currency (Nazir et. al, 2010b). Singh (2010) investigates the link among the macro-variables and the Indian stock market’s index. The factors that were considered were industrial production, BSE Sensex, exchange rate and wholesale price index. Data was taken from April 1995-March 2009 on monthly basis. Granger causality, correlation and unit root stationary tests were used. The results that found were vague as there is strong correlation among industrial production and BSE Sensex. Also the wholesale price and BSE Sensex were strongly correlated. But exchange rate and BSE Sensex were not strongly correlated. Although the outcomes demonstrates that there is strong correlation between the macro variables and the BSE Sensex but the connection that comes out was just one i.e. industrial production and stock market that illustrates that Indian stock market is in its emerging phase. The correlation among all the factors was high. The Granger causality test illustrates that wholesale price and exchange rate is not liable to create vibrations in the Indian stock exchange but there are some other factors which influenced them. Rjoub et al. (2009) investigate the effects of macro factors on stock returns by analyzing the data of 193 corporations listed in Istanbul Stock Exchange (ISE) from January 2001 to September 2005. They classified these companies into 13 portfolios. In this study, six macroeconomic factors are considered that is unanticipated inflation, real exchange rate, the term structure of interest rate, risk premium, money supply (M1), and unemployment rate. In this regards the correlation and regression analysis
  21. 21. Impact of macroeconomic factors on stock returns 21 technique were used and Results specify that there is no serial correlation among these portfolios. The regression analysis pointed out the significant difference among these market portfolios with respect to the macroeconomic factors. The complete analysis results show that, statistically seven portfolios had significant effect of unanticipated inflation while risk premium had a key impact on three portfolios. Alongside, money supply influenced two portfolios and one portfolio by term structure. In contrast with this the unemployment rate and real exchange rate has no such significance in all portfolios statistically. Hence it is recommended that even though there is strong linkage among stock returns and tested macro factors however some further macroeconomic factors are also responsible for affecting the stock market returns in Istanbul Stock Exchange (ISE) (Rjoub et al., 2009). Gay Jr (2008) examines the link between the stock market price index and the macro-economic factors of exchange rate and oil prices for the emerging economies i.e. China, Brazil, Russia and India. The date was taken from March 1999 to June 2006. The Box-Jenkins ARIMA model was used to determine the link among the dependent factor stock market price and the independent macro-factors i.e. Exchange rate and oil prices. The analysis did not tell any significant relationship among the variables. Other factors like interest rates, inflation and trade balance etc may impact the stock prices more significantly. As assumed, the linkage between exchange rate and the stock index price should relate positively. But it was found to exist among the exchange rate and stock price for India, China and Brazil but not for Russia. Zafar et al. (2008) examine that what effect can be on stock return if there is volatility in interest rate. Volatility is checked through the monthly return of Karachi Stock Exchange and the treasury bills of 90 days for the time of 2002 to 2006. The
  22. 22. Impact of macroeconomic factors on stock returns 22 GARCH (1, 1) model is used, one hand it is checked with and without interest rate’s effect. The outcome shows that conditional market return has negative significant impact on interest rate in contrast there is negative insignificant result of interest rate with conditional variance returns. These outcomes mutually describe that interest rates have “strong positive predictive power for stock returns” but “weak predictive power for volatility”. Stock return’s variation has been studied many times that what factors are affecting them. There is a significant role of stock market in measuring any economy’s economic condition. Better stock returns define greater profitability of firms as well as overall development of economy (Zafar et al., 2008). Stock return volatility is defined as the fluctuations in the stock prices changes throughout a period of time. There is more volatility when stock prices decreases rather than stock price increases. If there is any change in interest rate that will affect the company’s stock as well as company’s shares in last it will also influence stock return. If interest rate goes up then risk and required rate return of an investment will be higher but the company’s profitability will be lower thus the stock value will be down (Zafar et al., 2008). Investors are persuaded by high interest rate to retain their savings in bank accounts for sake of higher profit. They prefer it on to put their money in risky stock market. Whenever risk free return goes down, investors put their investment in stock market. Therefore, the stock market arises when demand of stocks boosts and as a result of interest rate cut (Zafar et al., 2008). Ratanapakorn and Sharma (2007) investigate the short and long term relation among the six macroeconomic variables and US stock price index (S&P 500) and by using data from January 1975 to April 1999. The study observes that stock prices have negative relationship with long term interest rate but short term interest rate,
  23. 23. Impact of macroeconomic factors on stock returns 23 industrial production, exchange rate, inflation and money supply have positive relationship with it. Variables used for the study are money supply, inflation, real economic activity, foreign exchange rates and short term and long term interest rate. The study uses the technique vector error correction model (VECM) with Granger causality after forecasting variance of that forecast is done by error correction model. Results of study indicates that all of the long term variables have an effect on US stock prices but there is no such confirmation or proof of short term variables. Among all six macro variables which considered in study, only bond rate explain stock prices of US more than any other variables. Gan, Lee, Yong, & Zhang (2006) scrutinizes the connection among the New Zealand stock index and seven macro-economic factors i.e. oil prices, inflation, exchange rate, long term interest rate, money supply, gross domestic product, and short term interest rate. The data was taken from January 1990-2003. Time series data and monthly observations were taken of both dependent and independent variables. Co-integration tests were applied during this study. To test that New Zealand stock market is an important indicator for macroeconomic factors Granger-causality tests and Johansen Maximum Likelihood were also applied. Also the innovation accounting analysis was used to examine the short run dynamic linkage between New Zealand stock market and the macroeconomic factors. The results of Johansen co- integration test shows that there is long term relationship among the seven variables and New Zealand stock market while the results of Granger-causality test indicates that the stock market of New Zealand is not an important indicator because it’s stock market is small if we compared it to the markets of developed countries. At the end, the innovation accounting shows consistency with the other empirical results of stock market.
  24. 24. Impact of macroeconomic factors on stock returns 24 Chapter # 3 Methodology
  25. 25. Impact of macroeconomic factors on stock returns 25 3.1 Researchapproach In this research, quantitative research approach is used. The quantitative researches put emphasis on scrutinizing the fundamental associations among variables. The mathematical and statistical based methods and tools are used to collect the data and quantify the results which help the researcher to draw conclusions. 3.2 Researchpurpose The purpose of this research is to explain the causal relationship among the variables. The explanatory research is used when little information about the subject is known or past theories do not apply to the current study. Explanatory research gathers data, clarifies problem and then creates initial hypothesis. 3.3 Researchdesign The co relational research design is used in this study. It is a design which is used to find out the linkage between two variables of the similar group. In addition it investigates either there is any impact of one variable on the other or not. In simple words change in one variable (independent) brings change in other variable (dependent) of not and to which extent this co variation exists. 3.4 Data source The data which is not collected by the researchers themselves is called secondary data. In this research the secondary data is extracted from the bona fide sources which are the websites of the Index mundi and World Bank.
  26. 26. Impact of macroeconomic factors on stock returns 26 3.5 Sample size and period In this study, the data of Karachi Stock Exchange (KSE 100 index), from the year 1993-2012 is taken. 3.6 Statistical technique We use regression technique in the research. Regression is a statistical measure which tries to determine relationships between a dependent variable and the other independent variables. Dependent variable is usually denoted by Y. 3.7 Model SR= αo+ β1ER+ β2IR+ β3GDP+ β4OP+ β5FDI+ ε Where; SR is Stock Return ER is Exchange Rate IR is Interest Rate GDP is Gross Domestic Product OP is Oil Price FDI is Foreign Direct Investment 3.8 Model hypothesis H01: Exchange Rate has an insignificant impact on stock returns H02: Interest Rate has an insignificant impact on stock returns H03: Gross Domestic Product has an insignificant impact on stock returns H04: Oil Price has an insignificant impact on stock returns H05: Foreign Direct Investment has an insignificant impact on stock returns
  27. 27. Impact of macroeconomic factors on stock returns 27 3.9 Variable description Following are the variables of this study. 3.9.1 Stock returns It is a rate which the investors get by overall its investment in the stock. It consists of two parts dividend and capital gain. 3.9.2 Exchange rate It is a rate at which one country’s currency can be traded for another. 3.9.3 Interest rate It is a rate which is charged for the use of resources. It is frequently articulated as a yearly proportion of the principal. 3.9.4 Gross domestic product The monetary worth of the entire services and goods produced in a country. 3.9.5 Oil prices It is a price of crude oil which is prevailing in the world in a year. 3.9.6 Foreign direct investment Investment made by a company of one country in another country.
  28. 28. Impact of macroeconomic factors on stock returns 28 Chapter # 4 Data Analysis
  29. 29. Impact of macroeconomic factors on stock returns 29 4.1 Introduction The core rationale of this paper is to scrutinize the impact of macroeconomic variables on the stock market returns in Pakistan. The data of the factors has been gathered from index mundi and World Bank website. To test the impact of macroeconomic variables on the stock returns, the least square technique in regression analysis has been used. To test the impact of independent variable on dependent variable the following analysis has been done. 4.2 Summary of Statistics Table # 1 descriptive statistic GDP FDI ER OP DR SR MEAN 3.792000 1.31600 57.54700 45.020500 12.42500 0.05150 MAXIMUM 7.6700 3.670 93.400 105.0100 19.000 0.250 MINIMUM 1.0100 0.380 0.380 13.0700 7.500 -0.170 STD.DEV 1.8722871 0.955557 19.065612 31.7955895 3.416350 0.127249 OBSERVATIONS 20 20 20 20 20 20 The above information is used to interpret the essential properties of the data. The first factor is gross domestic product (GDP) growth which demonstrates the maximum value of 7.6700 and the minimum value of 1.0100. Total number of observations is 20, while no value is missing. The data shows increasing trend during the period from 1993-2012. The second factor is foreign direct investment (FDI) as percentage of GDP. This illustrates the maximum value of 3.670 and the minimum value of 0.380. The data demonstrates a mix trend of increasing and decreasing FDI from 1993-2012. But it significantly increases from 2004-2007.
  30. 30. Impact of macroeconomic factors on stock returns 30 The third factor is exchange rate (ER) which is dollar into rupee. This demonstrates the maximum value of 93.400 and the minimum value of 0.380. The data illustrates an increasing trend for the duration of the period 1993-2012. The fourth factor is price of crude oil (OP) per barrel in US dollar. This demonstrates the maximum value of 105.0100 and the minimum value of 13.0700. The data illustrates an increasing trend throughout the period from 1993-2012. The fifth factor is discount rate of State bank of Pakistan. This demonstrates the maximum value of 19.000 and the minimum value of 7.500. The sixth factor (which is dependent) is stock returns calculated from KSE 100 index by using the percentage change method. This illustrates the maximum value of 0.250 and the minimum value of -0.170. The data consist of seven negative and thirteen positive stock returns of KSE 100 index. 4.1.1 Parameter Estimation Table # 2 Estimated Results Variable Coefficient T-Statistics Probability VIF C -2.947688 -1.786566 0.1172 DR 1.247192 2.077031 0.0764 1.480 ER 0.074129 4.064093 0.0048 1.655 GDP 1.418971 4.958068 0.0016 5.369 OP -2.286445 -4.155569 0.0043 5.737 FDI 0.488258 2.273716 0.0572 1.606 Adjusted R-Squared 0.734339 Durbin-Watson Stat 2.500920 F-Statistic 7.634075 Prob (F-Statistic) 0.009381 The above table consists of (Constant, discount rate, exchange rate, gross domestic product, oil prices and foreign direct investment).
  31. 31. Impact of macroeconomic factors on stock returns 31 Adjusted R square elucidate the accurateness in the stock returns, that is explain by the discount rate, exchange rate, gross domestic product, oil prices and foreign direct investment. In the above model the value of Adjusted R square is 0.734339 which clarify that discount rate, exchange rate, gross domestic product, oil prices and foreign direct investment can be estimated by 73.4339 % of the stock market returns. It shows that we have decent model explaining around 73.4339 % of stock returns in Pakistan. Durbin Watson demonstrates the auto-correlation in the factors. It should range from 1.5 to 2.5. In the study, Durbin Watson is 2.5 which indicate that there is no auto-correlation in our preferred variables. Probability of F-Statistic symbolizes the importance of the model. Less than 0.05 probability value of F-Statistic clarify that discount rate, exchange rate, gross domestic product, oil prices and foreign direct investment are the good predictor of stock returns in Pakistan and that's why rejects the null hypothesis. Whereas, the greater than 0.05 probability of F-Statistic value shows that discount rate, exchange rate, gross domestic product, oil prices and foreign direct investment is not good predictor of stock returns in Pakistan and accepts the null hypothesis. In our model, the probability of F-Statistic is 0.009381 which is smaller number than 0.05 which identify the independent variable of our model is good predictor of the dependent variable. SR= -2.947688+ 0.0741291ER+ 1.247192IR+ 1.418971GDP-2.286445OP+ 0.488258FDI Constant value is -2.947688 that refer the Y intercept which explains that those variables which might affect the stock returns and not considered in the study. This means, if all variables are 0, so constant value is the estimated value of stock returns.
  32. 32. Impact of macroeconomic factors on stock returns 32 Coefficient of discount rate is 1.247192 that shows that the one unit increase in discount rate will cause a 1.247192 unit increase in stock returns in Pakistan. The rationale of positive and significant relationship between discount rate and stock returns is that the discount rate is used to control the inflation in the economy by the Central Bank of Pakistan. When interest rate rises, it decreases the inflation which enables people to buy more of goods and services. This impacts the firm’s cash flows of the firm and result in higher stock returns. Another possible reason is that the progress in the profit outlook boosts the cumulative demand and, therefore, investment and, thus raises the interest rate. Coefficient of exchange rate is 0.074129 that depicts one unit rise in exchange rate will be caused a 0.074129 unit boost in stock returns in Pakistan. The cause of positive and considerable relationship between exchange rate and stock returns in Pakistan is; increasing exchange rate or depreciation in domestic money could influence the export-oriented firms positively. The significant relationship between exchange rate and stock prices signify the intensity of openness of stock market, globally. As the local currency depreciated so the goods and services becomes cheaper for the international market. So the international customers increase the demand of goods and services produce in the country that helps to increase the profits of the firms which enables them to give more dividend or in other words more stock returns. Coefficient of GDP is 1.418971 that means increase of one unit in GDP will be caused a 1.418971unit raise in stock returns in Pakistan. The explanation of positive relationship between GDP and stock returns in Pakistan is when the firms produce more of goods and services it will increase the GDP of the country and the firms can earn more profits which in turns increase the stock returns.
  33. 33. Impact of macroeconomic factors on stock returns 33 Coefficient of oil prices is -2.286445 that mean one unit increase in oil prices will be caused a -2.286445 unit decrease in stock returns in Pakistan. The rationale of negative relationship between oil prices and stock returns is that the cost of production is directly associated with the oil prices in Pakistan as we are oil importing nation and the increase in international oil prices will directly shifts the production cost upwards and thus results in lowering profit. So the firm’s returns will be negatively affected. Coefficient of foreign direct investment is 0.488258 that mean one unit raise in foreign direct investment will cause a 0.488258 unit raise in stock returns in Pakistan. This may be rationale of positive relationship between foreign direct investment and stock returns in Pakistan in which FDI increases the employment and the public has more money to spend so they buy goods and services which helps the firms to produce more and generate more profits which in turns increase their stock returns. The values of VIF of all variables in our model are less than 10 which mean that there is no multi-co linearity issue in the model.
  34. 34. Impact of macroeconomic factors on stock returns 34 Chapter # 5 Conclusion and Recommendations
  35. 35. Impact of macroeconomic factors on stock returns 35 5.1 Conclusion In the current literature, the relationship among macroeconomic variables and stock returns are studied by using regression model in the context of Pakistan. There were five variables of the macroeconomic variables which are concerned in the study: Discount Rate (DR), Exchange Rate (ER), Gross Domestic Product (GDP), Oil Prices (OP), and Foreign Direct Investment (FDI). Data of macroeconomic variables are collected from Index mundi and World Bank’s website for the period 1993 to 2012. Whereas, Stock returns are calculated from KSE 100 index by percentage change method. Results indicate that DR, ER, GDP, and FDI have significant positive relationship with stock returns. On the other side OP only the variable in the study which shows significant negative relationship with the stock returns. The results of all the variables are very much similar to the previous literature. As in empirical study the findings of Zhu (2012) and Benakovic and Posedal (2010) about ER is positive with the stock returns verifies the relationship found in our study however there were authors Khalid et al. (2010) whose research findings shows negative relationship of ER with the stock returns. If DR increases by it will impact positively on stock return. The finding is similar to some previous studies of Benakovic and Posedal (2010) and Ratanapakorn and Sharma (2007) while contrast with Chen et al. (2012), Khalid et al. (2010) and (Haque & Sarwar, 2012). In similar way, if GDP rise then the stock returns will behave positively. The results align with studies of (Haque & Sarwar, 2012), (Benakovic & Posedal, 2010) and (Ratanapakorn and Sharma, 2007). FDI has also shown positive impact on the Stock Returns as in (Zafar, 2013). However, OP indicates that if OP increases then the stock return will fall that show the significant negative relationship. Hassan and Rifai (2012) ; Chen et al. also proved the significant
  36. 36. Impact of macroeconomic factors on stock returns 36 negative relationship of OP with stock returns but , (Benakovic & Posedal, 2010) and (Hosseini et al. 2011) shows inverse case. 5.2 Recommendations We suggest the following after analyzing the above study:  It is found that stock returns are highly dependent on economic variables. Such a mechanism should be adapted which helps to increase the benefit of economic factors so the investor gets a higher return on their investment and then they could re-invest in the economic cycle.  If there is regular investment flow in the stock market, it will increase the business activities. Such policies should be made which increase the economic activities in the country which in turns raise the economic development.  The result indicates that GDP is the most considerable economic variable to expect about the stock market returns. So the investor should carefully examine the GDP rate of the country before investing in stock market for better returns.  The discount rate is also an influential variable on stock returns. If DR is high the stock returns will also increase. So the investor should take the risk to invest in the stock market rather than in commercial banks.  Government should control the exchange rate, which is beneficial to the export oriented companies which will lead to the high returns of their stock.  Another economic factor is FDI which has significantly positive impact on stock returns, so the Government should take such steps which encourages
  37. 37. Impact of macroeconomic factors on stock returns 37 foreign companies to do FDI in the country, the law and order situation is one the key influential factor in this regard.  The companies should rely on other sources to generate energy rather than oil only. This can reduce their cost of production and will lead to the higher profit which in turns increase returns of their investors. 5.3 Future Recommendation Some recommendations for further studies on this topic are as follows:  The more economic variables like inflation, money supply, unemployment rate and gold prices etc can be considered in the study which impacts stock returns.  The data of other market like Lahore stock exchange (LSE), Islamabad stock exchange (ISE) can be included to get more definite results in Pakistan.  The further in depth analysis of this topic can be done through other models like EGARCH, GARCH, ADRL, DBEKK, VAR and VECM etc.
  38. 38. Impact of macroeconomic factors on stock returns 38 Chapter # 6 Bibliography
  39. 39. Impact of macroeconomic factors on stock returns 39 ACKNOWLEDGEMENT We are to be grateful for the small things in life, the bigger stuff just seems to show up from unexpected sources, and we are constantly looking forward to each day with all the surprises that keep coming my way! No metaphysician ever felt the deficiency of language as much as the grateful. The first and the foremost gratitude go to Allah Almighty- the omnipresent and omniscient for His countless blessings and for providing us one now and then which in turn obliges us to thank Him again! We are extremely grateful to our facilitator Nadeem Khan from whom we found never ending support, assistance, amity and love. He always guided us through thick and thin. We would like to appreciate our families and friends who did not leave our side in all situations and proved to be our pillars of strength. We would like to thank all the faculty members of Iqra University and our colleagues for providing us a helping hand during our research project. Last but not the least we would like to pay a deep gratitude to our university for making us capable to do research work and get experience on this. With sincere appreciation, we wish there should more academies like it.
  40. 40. Impact of macroeconomic factors on stock returns 40 TABLE OF CONTENTS Acknowledgement ..........................................................................................................i Abstract ......................................................................................................................... iv Chapter # 1.....................................................................................................................1 1.1 Introduction..........................................................................................................2 1.2 Statement of problem...........................................................................................3 1.3 Research question ................................................................................................4 1.4 Objective of the study..........................................................................................4 1.5 Significance of the study......................................................................................4 1.6 Limitation and delimitation of the study..............................................................4 Chapter # 2.....................................................................................................................6 2.1 Theoretical background........................................................................................7 2.1.1 Financial market............................................................................................7 2.1.2 Primary versus secondary markets................................................................7 2.1.3 Stock market .................................................................................................7 2.1.4 Stock market returns .....................................................................................8 2.2 Empirical studies..................................................................................................8 Chapter # 3...................................................................................................................24 3.1 Research approach .............................................................................................25 3.2 Research purpose ...............................................................................................25 3.3 Research design..................................................................................................25 3.4 Data source.........................................................................................................25 3.5 Sample size and period ....................................................................................266 3.6 Statistical technique ...........................................................................................26 3.7 Model.................................................................................................................26 3.8 Model hypothesis ...............................................................................................26 3.9 Variable description.........................................................................................277
  41. 41. Impact of macroeconomic factors on stock returns 41 3.9.1 Stock returns ...............................................................................................27 3.9.2 Exchange rate..............................................................................................27 3.9.3 Interest rate..................................................................................................27 3.9.4 Gross domestic product...............................................................................27 3.9.5 Oil prices.....................................................................................................27 3.9.6 Foreign direct investment ...........................................................................27 Chapter # 4...................................................................................................................28 4.1 Introduction........................................................................................................29 4.2 Summary of Statistics ........................................................................................29 4.1.1 Parameter Estimation..................................................................................30 Chapter # 5...................................................................................................................34 5.1 Conclusion .........................................................................................................35 5.2 Recommendations..............................................................................................36 5.3 Future Recommendation....................................................................................37 Chapter # 6...................................................................................................................38 References
  42. 42. Impact of macroeconomic factors on stock returns 42 Abstract This paper explores the relationship between Karachi Stock Exchange Index returns and macroeconomic variables by analyzing the impact of macroeconomic variables on stock market returns. For this purpose, the least square technique has been used in regression analysis. The 20 observations time series data from 1993 to 2012 have been analyzed and the finding shows Discount Rate, Exchange Rate, Gross Domestic Product, and Foreign Direct Investment have a significant positive relationship, while Oil Prices has significant negative relationship with stock returns. The results support previous studies and hence it is concluded that these macroeconomic variable play an integral part in predicting the returns of the stock market. So the investor and controlling authorities should keep their eyes on these variables for better returns and to establish the stable stock market returns respectively. Keywords: Karachi Stock Exchange, Stock returns, Macroeconomic variables, Regression analysis

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