Title: Interaction among stock prices and monetary variables in Pakistan

Authors: Ghulam Abbas; David G. McMillan

Addresses: Sukkur Institute of Business Administration, Airport Road, Sukkur 65200, Sindh, Pakistan ' Division of Accounting and Finance, Stirling Management School, University of Stirling, FK9 4LA, Scotland, UK

Abstract: The interaction between stock market and monetary variables in Pakistan using monthly data for the last 20 years is examined. The Johansen co-integration approach is utilised to examine the equilibrium relationship between the stock price index, money supply, interest rates and a foreign exchange rate. An unrestricted VAR model is also used in order to analyse short-run dynamics and causality within these variables. The results report a long-run and significant relationship between these variables. In particular, the VAR model indicates that fluctuations in the KSE-100 index are significantly affected by the money supply and exchange rate but not the interest rate. Moreover, money supply has a positive relationship with the stock market and a negative relationship with interest rates and exchange rates. Interest rates have a weak and mixed relationship with all other variables. The dynamic relationships should aid policy-makers in understanding the effects of monetary policy changes.

Keywords: money supply; interest rates; KSE-100 index; foreign exchange rates; VAR; vector autoregressive; Pakistan; stock prices; monetary variables; stock markets; Johansen co-integration; monetary policy.

DOI: 10.1504/IJMEF.2014.063839

International Journal of Monetary Economics and Finance, 2014 Vol.7 No.1, pp.13 - 27

Received: 16 Jul 2013
Accepted: 25 Jan 2014
Published online: 03 Mar 2015 *

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