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Monetary Expansion and Stock Returns in Pakistan

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  • Husain, Fazal
  • Mahmood, Tariq

Abstract

The objective of the paper is to examine the causal relationship between money supply and stock prices in Pakistan. Two measures of money stocks (M1 and M2) and six stock price indices (general and five sectors) were taken for the period June 1991 to June 1999. The co-integration analysis indicates a long run relationship between stock prices and money supply for both M1 and M2. The Error Correction Model, on the other hand, does not endorse the long run relationship between stock prices and M1. Regarding long run relationship between stock prices and M2, the model suggests a unidirectional causality running from M2 to stock prices. The model also shows the evidence of short run effects of M2 on stock prices. The analysis suggests that the stock market is not efficient with respect to money supply.

Suggested Citation

  • Husain, Fazal & Mahmood, Tariq, 1999. "Monetary Expansion and Stock Returns in Pakistan," MPRA Paper 5020, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:5020
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    References listed on IDEAS

    as
    1. Kraft, John & Kraft, Arthur, 1977. "Determinants of Common Stock Prices: A Time Series Analysis," Journal of Finance, American Finance Association, vol. 32(2), pages 417-425, May.
    2. Ho, Yan-ki, 1983. "Money supply and equity prices : An empirical note on Far Eastern countries," Economics Letters, Elsevier, vol. 11(1-2), pages 161-165.
    3. Rozeff, Michael S., 1974. "Money and stock prices : Market efficiency and the lag in effect of monetary policy," Journal of Financial Economics, Elsevier, vol. 1(3), pages 245-302, September.
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    Cited by:

    1. Tarak Nath Sahu & Krishna Dayal Pandey, 2020. "Money Supply and Equity Price Movements During the Liberalized Period in India," Global Business Review, International Management Institute, vol. 21(1), pages 108-123, February.
    2. Sirucek, Martin, 2012. "The impact of money supply on stock prices and stock bubbles," MPRA Paper 40919, University Library of Munich, Germany.
    3. Sirucek, Martin, 2012. "Macroeconomic variables and stock market: US review," MPRA Paper 39094, University Library of Munich, Germany.
    4. Cai, Yifei, 2016. "货币增速剪刀差与股票市场收益率的时变格兰杰因果关系研究 [A Study on the Time-varying Granger Causality Relation of Scissors Gap of Money Supply and Stock Market Return]," MPRA Paper 73369, University Library of Munich, Germany.
    5. 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.
    6. Faisal Khan & Saif-Ur-Rehman Khan & Hashim Khan, 2016. "Pricing of Risk, Various Volatility Dynamics and Macroeconomic Exposure of Firm Returns: New Evidence on Age Effect," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 551-561.
    7. Širůček, Martin, 2015. "Kauzalní vztah peněžní nabídky a amerického akciového trhu [Money supply and US stock market causality]," MPRA Paper 66357, University Library of Munich, Germany, revised 30 Aug 2015.

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    More about this item

    Keywords

    : Money; Stock Prices; Pakistan; Long Run Relationship; Market Efficiency;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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