Influences on Investment decision in the Pakistan Stock Exchange

Abstract

The research is intended to determine factors affecting Investors at Pakistan Stock exchange, and for this purpose four macroeconomic variables; interest rate, inflation rate, exchange rate and FDI were selected as predictors and return of KSE 100 was included as a dependent variable. Meanwhile, the time frame of the study was from January 2001 to December 2015 and the frequency of the data was monthly. The preliminary testing and diagnostic analysis suggested towards Johansen Cointegration which further suggested VECM and Granger causality. Empirical findings of the study suggest that there are cointegration equations within the variables, implying that variables can be used to perform estimation and prediction of another variable. Meanwhile, VECM model reveals no significant effect of the macroeconomic variables on the stock market in long-run at lag 1; but at lag 2 interest rate and FDI shows a negative and significant effect on the KSE 100 returns. In addition to this, granger causality also shows no short-run bi-directional interrelation of macroeconomic variables with KSE 100 returns. Therefore, it is concluded that in Pakistan macroeconomic variables does not influence investor’s behaviors and do not affect investing trend in KSE 100 index. Meanwhile, implications for policymakers, investors, regulatory authorities, government and for researcher have also been discussed in the paper.