Long-Run Relationship Between Macroeconomic Variables and Stock Return: Evidence from Karachi Stock Exchange (KSE)

The purpose of this study is to share in the existing literature by investigating long-run effect of macroeconomic variables on the movement of Karachi Stock Exchange (KSE) return. The monthly data of inflation, exchange rate, Treasury bill and Stock return is taken from the period of January 2000 to December 2010. The result of descriptive statistics revealed that KSE return provides highest return. Co-integration is used for the purpose to explore the long run co-movement between different series. The result showed that there is no co-movement exists between variables and KSE return. The data was not stationary at ADF & PP level but at first difference data become stationary. The result of correlation shows that there is no significant positive correlation among these variables. There is insignificant positive correlation between T-Bill and inflation and T-bill & X-Rate. In order to investigate the direction of flow of information Granger causality test is used. The result shows that X-Rate granger causes the RM. Similarly inflation granger causes the T-Bill. The result of impulse function response showed that changes in stock prices of KSE are due to by itself. T-bill exerts pressure on inflation. Variance decomposition is used for the purpose to show the decomposition of variance. The result shows that that most of the changes in inflation are explained by itself and other variables have no or very little effect on it. So inflation is found exogenous among these variables because. 97 percent change in inflation in comes from itself.