The Inflation, Exchange Rate and Stock Market returns Nexus: An Empirical Evidence from Pakistan

Abstract

The present study looks into the casual short and long-run associations between stock traded use as a proxy of stock market returns of Pakistan and macroeconomics indicators namely exchange rate, consumer price index used as a proxy of inflation, gross domestic products, unemployment, gross national expenditure, and interest rate by using time series analysis from (1960 to 2020). To highlight the stationarity of the data use Augmented Dickey Fuller Unit Root test, inflation and interest rate becomes stationer at level and other macroeconomics variables stationer at first difference. With the mixture of level and the first difference has been applying Auto-Regressive Distributed lag model and co-integration technique. For diagnostic used Breusch-Pagan-Godfrey and serial correlation LM test and Ganger causality test. Outcomes express the long time period affiliation betwixt stock market returns of Pakistan and macroeconomics variables including exchange rate, interest rate, and unemployment they are significant and negatively affect the stock market returns in long duration. By applying Granger causality test conclude no causal relationship exist among all variables. There Consumer price index and gross national expenditure negatively associated but its results are insignificant. Only GDP positively related to stock market returns in the long period. The findings of the research favorable for  policy makers who interested in the long run relationship among the exchange rate, inflation, GDP, interest rate and unemployment and stock market returns.