The Impact of Macroeconomic Variables on Stock Prices in Pakistan

Purpose: The macroeconomic variables are crucial for any change in economy for a country. Any abrupt change among these variables has impact on the economy in various ways. In case of any change the regulatory authority take steps and make amendment in their policies that would put the economy on development track. The aim of the study is to determine the impact of interest rate, exchange rate, and GDP and inflation rate on stock prices in Pakistan. The monthly data of eleven years ranges from 1st January, 2001 to December 31th 2011 was used for this research study. Methodology: Granger causality and cointegration tests are applied on the data to estimate the possible impact of macroeconomic variables on stock prices. Findings: The findings of the study revealed that there is no relationship between dependent variable and explanatory variables in short run. On the other hand results show that there is strong relationship in long run. Recommendations: It is concluded that in long run there is significant relationship between macroeconomic variables on stock prices.