Macroeconomic Variables and Stock Market Performance: Testing for Dynamic Linkages with a Known Structural Break

Abdul Rashid ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the dynamic interactions between four macroeconomic variables and stock prices in Pakistan, using cointegration and Granger causality tests that are robust to structural breaks. The results strongly suggest cointegration between the stock prices and macroeconomic variables viz. consumer prices, industrial production, exchange rate and the market rate of interest. Estimates of bivariate error-correction models reveal that there is long-run bidirectional causation between the stock prices and all the said macroeconomic variables with the exception of consumer prices that only lead to stock prices. The results also provide some evidence that the stock prices Granger-caused by changes in interest rates in the short run. However, the analysis is unable to explore any short-run causation between the stock prices and the remaining three macroeconomic variables. It may therefore be stated that the association between the health of the stock market in the sense of a rising share prices and the health of the economy is only a long-run phenomenon.

Keywords: Stock Returns; Exchange Rates; Interest Rates; Industrial Output; Prices; Economic Activity; Structural Breaks; Additive-Outlier Model (search for similar items in EconPapers)
JEL-codes: C22 P34 (search for similar items in EconPapers)
Date: 2008-01-15
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published in Saving and Development XXXII.1(2008): pp. 77-102

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