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The Stock Market and the Economy in Pakistan

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  • Husain, Fazal
  • Mahmood, Tariq

Abstract

This paper re-examines the causal relationship between stock prices and macro variables like consumption expenditure, investment spending, and economic activity (measured by GDP) in Pakistan. Using annual data from 1959-60 to 1998-99 and applying cointegration and error correction analysis, the paper indicates the presence of long-run relationship between stock prices and macro variables. Regarding the cause and effect relationship, the analysis indicates a one-way causation from macro variables to stock prices, implying that in Pakistan fluctuations in macro variables cause changes in stock prices. The findings suggest that the stock market in Pakistan is not that developed to play its due role in influencing aggregate demand. A disturbing feature of the stock market in Pakistan is that it cannot be characterised as the leading indicator of economic activity. In the absence of other strong indicators, shooting up of stock prices may indicate a speculative bubble. I. INTRODUCTION The stock market plays an important role in the economy by mobilising domestic resources and channelling them to productive investment. This implies that it must have a significant relationship with the economy. The relationship can be seen, in general, in two ways. The first relationship views the stock market as the leading indicator of the economic activity in the country, whereas the second focuses on the possible impact the stock market may have on aggregate demand, particularly through aggregate consumption and investment. In other words, whether changes in stock market cause fluctuations in macroeconomic variables, like Consumption Expenditures, Investment Spending, Gross Domestic Product (GDP), Index of Industrial Production (IIP), etc., or are caused by these variables is an interesting issue to be examined. The former case implies that stock market leads economic activity, whereas the latter suggests that it lags economic activity. The knowledge of the relationship between stock prices and macro variables is now becoming more important in the case of developing countries in view of the various economic reforms taking place there. From the beginning of the 1990s, a number of Fazal Husain and Tariq Mahmood are Senior Research Economist and Research Economist, respectively, at the Pakistan Institute of Development Economics, Islamabad. Authors’ Note: We are grateful to Dr Abdul Qayyum, Dr A. R. Kemal, and Dr Faiz Bilquees for their valuable comments and suggestions on an earlier draft of the paper.

Suggested Citation

  • Husain, Fazal & Mahmood, Tariq, 2001. "The Stock Market and the Economy in Pakistan," MPRA Paper 4215, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:4215
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    References listed on IDEAS

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    1. Barry Bosworth, 1975. "The Stock Market and the Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 257-300.
    2. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
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    1. Naushad Alam, 2017. "Analysis of the impact of select macroeconomic variables on the Indian Stock Market: A heteroscedastic cointegration approach," Business and Economic Horizons (BEH), Prague Development Center, vol. 13(1), pages 119-127, March.
    2. Muhammad Naveed Jamil & Hafsa Khan & Zuhaib Nishtar & Dr. Abdul Rasheed, 2023. "Exploring The Role Of Stock Exchanges And Exchange Rates For Sustainable Economic Development: A Cross Culture Study Of Emerging And Developed Markets," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 12(2), pages 308-319.
    3. Nadeem Iqbal & Sajid Rahman Khattak & Muhammad Arif Khattak, 2013. "Relationship between Macroeconomic Variables and KSE-100 Index: Evidence from Pakistan," Knowledge Horizons - Economics, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 5(4), pages 101-105, December.
    4. Ogbulu & Onyemachi Maxwell & Ajibola & Nwakanma, 2014. "Equity Risk Premium, Macro-Economic Variables and Co-Integration: Evidence from Nigeria," International Journal of Empirical Finance, Research Academy of Social Sciences, vol. 2(2), pages 83-95.
    5. Khan, Abdul Qayyum Khan & Khattak, Naeem Ur Rehman Khattak & Khattak, M Saghir & Hussain, Anwar Hussain, 2008. "Inter-Dependencies in Budget Deficit and its Financing Sources in Pakistan (1960-2005)," MPRA Paper 42031, University Library of Munich, Germany.
    6. Rashid, Abdul, 2007. "Exchange rates or stock prices, what causes what: A firm level empirical investigation," MPRA Paper 27209, University Library of Munich, Germany.
    7. Muhammad Shahbaz & Faridul Islam & Ijaz Ur Rehman, 2016. "Stocks as Hedge against Inflation in Pakistan: Evidence from ARDL Approach," Global Business Review, International Management Institute, vol. 17(6), pages 1280-1295, December.
    8. Matthew McCartney, 2011. "Pakistan, Growth, Dependency, and Crisis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 71-94, September.
    9. Nawaz, Kishwar & Lahiani, Amine & Roubaud, David, 2019. "Natural resources as blessings and finance-growth nexus: A bootstrap ARDL approach in an emerging economy," Resources Policy, Elsevier, vol. 60(C), pages 277-287.
    10. Alam, Naushad, 2017. "Analysis of the impact of select macroeconomic variables on the Indian stock market: A heteroscedastic cointegration approach," Business and Economic Horizons (BEH), Prague Development Center (PRADEC), vol. 13(1).
    11. repec:ers:journl:v:vi:y:2018:i:2:p:92-100 is not listed on IDEAS
    12. Mehr-un-Nisa & Mohammad Nishat, 2011. "The Determinants of Stock Prices in Pakistan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 1(4), pages 276-291, December.
    13. Mohammed Nishat & Rozina Shaheen, 2004. "Macroeconomic Factors and Pakistani Equity Market," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 619-637.
    14. Arshad Hasan & M. Tariq Javed, 2009. "An Empirical Investigation of the Causal Relationship among Monetary Variables and Equity Market Returns," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 14(1), pages 115-137, Jan-Jun.
    15. Javed Iqbal, 2012. "Stock Market in Pakistan," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 11(1), pages 61-91, April.
    16. Muhammad Wajid Raza & Hassan Muhsin, 2013. "Financial Liberalization and Macroeconomic Performance: Empirical Evidence from Selected Asian Countries," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 1(1), pages 16-27.
    17. Javid, Attiya Yasmin & Ahmad, Eatzaz, 2008. "Testing multifactor capital asset pricing model in case of Pakistani market," MPRA Paper 37341, University Library of Munich, Germany.
    18. Ruan, Qingsong & Wang, Zilin & Zhou, Yaping & Lv, Dayong, 2020. "A new investor sentiment indicator (ISI) based on artificial intelligence: A powerful return predictor in China," Economic Modelling, Elsevier, vol. 88(C), pages 47-58.
    19. Syed Imran Sajjad & Saleem Ullah Jan & Madiha Saddat & Ijaz ur Rehman, 2012. "Exploring the Nexus; Stock Market, T. Bills, Inflation, Interest Rate and Exchange Rate," Journal of Economics and Behavioral Studies, AMH International, vol. 4(7), pages 384-389.
    20. Khan, Abdul Qayyum Khan & Khattak, Naeem Ur Rehman Khattak & Hussain, Anwar Hussain, 2008. "Inter-dependencies and Causality in the Macroeconomic Variables: Evidence from Pakistan (1960-2005). Sarhad J. Agric. 24 (1): 199-205," MPRA Paper 42034, University Library of Munich, Germany.
    21. Javed Pervaiz & Teng Jian-Zhou & Junaid Masih, 2018. "Long Run Relationship between Selected Macroeconomic Indicators and Banking Sector in Pakistan," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 67-81, February.
    22. Rudi Bratamanggala, 2018. "The Factors Affecting Board Stock Price of Lq45 Stock Exchange 2012-2016: Case of Indonesia," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 115-124.

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    More about this item

    Keywords

    Stock Market; Economy; Pakistan; Linkages; Causality;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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