Causality between Macroeconomic Indicators and Stock Market: An Econometric Analysis

Muhammad Imad ud Din Akbar, Abdul Rauf Butt and Ali Farhan Chaudhry ()
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Muhammad Imad ud Din Akbar: National University of Modern Languages Pakistan
Abdul Rauf Butt: University of Punjab, Pakistan
Ali Farhan Chaudhry: Ryerson University Canada

Empirical Economic Review, 2021, vol. 4, issue 1, 137-155

Abstract: We attempt to examine the causality between economic growth and stock market performance of Pakistan for the years 1992M01-2012M12. For this purpose, the test devised by Granger (1988) has been employed. The results reveal a bi-directional causality between economic growth and stock market performance of Pakistan proxied by Karachi Stock Exchange capitalization (KSECAP). Once this bidirectional causality is established, a system of simultaneous equations has been specified and estimated by 2SLS to find the impact of economic growth and selected macroeconomic indicators on the stock market of Pakistan. The estimated results lead to the conclusion that economic growth affects the stock market of Pakistan and vice versa. The implications of the study are of paramount importance, especially for the emerging economies. Hence, bearing in mind the role of macroeconomic indicators in the performance of stock market a better policy can be formulated to enhance the growth of capital markets that in turn will increase the economic growth of emerging economies such as Pakistan and vice versa.

Keywords: KSE; Granger Causality; 2SLS (search for similar items in EconPapers)
JEL-codes: C50 E50 E60 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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