Exploring the Nexus between Pakistan's Stock Market and Macroeconomic Factors in the Context of Asian Equity Markets

Abstract

This study seeks to investigate the intricate relationship between various macroeconomic variables and stock market returns in the context of Pakistan. Utilizing the Pakistan Karachi Stock Exchange 100 index as a proxy for stock market returns, the research examines secondary data from January 2004 to December 2019. The study focuses on Real interest rate, GDP, unemployment rate, gold rate, Foreign direct investment, exchange rate, and Consumer Price Index (CPI) as independent variables. The research employs Pool Ordinary Least Squares (OLS) Regression to analyze the relationships between stock market returns and the identified macroeconomic indicators. The analysis reveals a nuanced interplay between the dependent and independent variables, indicating a generally weak overall relationship. Multicollinearity among explanatory variables is noted, urging cautious interpretation. The study's reliance on pooled OLS regression neglects potential cross-sectional heterogeneity. Notably, Foreign Direct Investment (FDI) and Consumer Price Index (CPI) show statistically significant relationships with stock market returns, suggesting selective economic influences. Future research should explore different time periods and include additional variables such as political instability, terrorism, and martial law influences to enhance analytical depth.