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Effect of Key Economic Variables on KSE

Effect of Key Economic Variables on KSE

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Published by Shahid Mehmood

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Published by: Shahid Mehmood on Oct 21, 2009
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11/03/2012

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CHAPTER 1INTRODUCTION
Broad Problem Area
Over the course of the past year the Pakistani economy hastaken such drastic turns that it has baffled even seasonedeconomists and researchers, one such change has been theunprecedented success of the Karachi Stock Exchange,represented mostly by the KSE-100 index. Just to take anexample, in April 2003 the KSE-100 index stood a hundredpoints shy of the 3000 mark, a coveted position at thattime, and now little over an year later it stands wellpast the 5000 point level. Such a radical change hasnaturally forced a lot of people to uncover thefundamental reasons behind the change. This research paperis an effort by the researcher to find out which are thefundamental determinants of the KSE index and what is theextent of their influence on it.
Background Of KSE 
The KSE is a relatively young (it was established soonafter independence in 1947) and small market. In 2002, ithad 758 stocks listed with a total market capitalizationof about $10 billion or 16% of GDP. The KSE captures 74%of the overall trading volume in Pakistan. There are twosmaller stock exchanges covering the remaining 26%: TheLahore stock exchange (22%), and the Islamabad stock
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exchange (4%). The KSE-100 index, which is a weightedprice index of the top 100 companies listed on the stockmarket, is usually taken as a benchmark index in Pakistan.
Rationale Of The Study 
There is a consensus among macroeconomists and financetheorists that stock market prices are driven bymacroeconomic variables, the so- called “fundamentals” inthe economy. Moreover, it is also agreed that the linkageis two-way; that is, feedback exists between the stockmarket and real activity.There has been a great deal of research into thephenomenon described above in the developed economies suchas the US, the UK, Germany, Japan etc, where researchershave come up with some very informative and insightfulresults. These results have helped them explain to somedegree the behavior of their stock exchanges and in turnhave helped them make better predictions about its currentand future performance. It is only logical that suchstudies be conducted for the Pakistani stock market sothat we too can benefit from the predictive power ofeconomic variables for our stock exchanges.
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Research Questions
Trying to investigate relations between the variables, theaim is to make it easier to try to answer the followinghypothesis:-1. Does industrial production affect the KSE index?2. Do interest rates affect the KSE index?3. Does inflation affect industrial production?4. Does inflation affect interest rates?5. Does inflation affect the KSE index?6. Do interest rates affect industrial production?In analysis of this paper ten years’ monthly data for theperiod 1994 until 2004 is taken for all variables.
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