Open AccessCausality between Macroeconomic Indicators and Stock Market: An Econometric Analysis
Author(s) -
Muhammad Akbar,
Abdul Rauf Butt,
Ali Farhan Chaudhry
Publication year - 2021
Publication title -
empirical economic review
Language(s) - English
Resource type - Journals
eISSN - 2522-2465
pISSN - 2415-0304
DOI - 10.29145/eer/41/06
Subject(s) - market capitalization , economics , stock market , granger causality , stock exchange , causality (physics) , monetary economics , stock (firearms) , capital market , emerging markets , economic indicator , stock market bubble , capitalization , macroeconomics , financial economics , econometrics , finance , mechanical engineering , paleontology , linguistics , philosophy , physics , horse , quantum mechanics , engineering , biology
We attempt to examine the causality between economic growth and stock market performance of Pakistan for the years 1992M01-2012M12. For this purpose, the test devised by Granger (1988) has been employed. The results reveal a bi-directional causality between economic growth and stock market performance of Pakistan proxied by Karachi Stock Exchange capitalization (KSECAP). Once this bidirectional causality is established, a system of simultaneous equations has been specified and estimated by 2SLS to find the impact of economic growth and selected macroeconomic indicators on the stock market of Pakistan. The estimated results lead to the conclusion that economic growth affects the stock market of Pakistan and vice versa. The implications of the study are of paramount importance, especially for the emerging economies. Hence, bearing in mind the role of macroeconomic indicators in the performance of stock market a better policy can be formulated to enhance the growth of capital markets that in turn will increase the economic growth of emerging economies such as Pakistan and vice versa.