IMPACT OF MACROECONOMIC FACTORS ON STOCK

MARKET RETURNS OF KSE 30 INDEX

Obaid Ur Rehman
Reg#MMS193016
Muhammad Kamran Aziz
Reg#MMS193031

Spring-2020

Submitted to
Dr. S.M.M Raza Naqvi
Department of Management and Social Sciences,
CUST, Islamabad

1
2
Contents
IMPACT OF MACROECONOMIC FACTORS ON STOCK MARKET RETURNS OF KSE 30
INDEX............................................................................................................................................................1
Obaid Ur Rehman........................................................................................................................................1
Dr. S.M.M Raza Naqvi................................................................................................................................1
CUST, Islamabad..........................................................................................................................................1
1. Abstract:.................................................................................................................................................4

3
IMPACT OF MACROECONOMIC FACTORS ON STOCK MARKET RETURNS OF
KSE 30 INDEX

1. Abstract:
The purpose of this study to examine the impact of macroeconomic variables (exchange rate,
inflation, interest rate) on stock market returns of KSE 30 index. Secondary data has been
used in this research. Data analysis technique that was used in this research are correlation,
and regression analysis. The study consists of data for the period of 10 years starting from
June 2008 till June 2018. For this purpose, quarterly data of KSE-30 index has been observed.
The results revealed that interest rate and inflation has a significant impact on stock market
returns, while exchange rate has an insignificant impact on stock market returns. The current
study is considered the first of its kind conducted on KSE 30 index. To the best of our
knowledge no such studies have been conducted on KSE 30 index returns.
Keywords: Stock market returns, interest rate, inflation rate, exchange rate.
2. Introduction:
The rapid growth in the equity market has fascinated investors as well as researchers, to study
the volatile behavior of stock market returns as a result of different macroeconomic factors.
Equity market is not only an avenue for the investors but also a source of capital for the firms.
The stock returns from equity market are highly influenced by multiple factors such as
performance of that particular stock, overall market conditions, prevailing economic
conditions, etc. The study of aforesaid variables is important enough to analyze the
performance of the stocks. In this regard, the causal relationship between macroeconomic
factors and volatility in stock market returns is the part of many researches. This type of
studies enables the investors to make effective and efficient investment decisions and also
helps the firms to improve their market worth.
In [ CITATION Nis05 \l 1033 ] Uses Vector Auto regression (VAR) to determine the impact
of macroeconomic variables on the stock returns of Bombay stock exchange (BSE) and
revealed that macroeconomic factors such as interest rate, gold price, exchange rate and
money supply is observed for the stock returns, additionally, a strong influence of the global
macroeconomic factor of the world price index is also observed, which implies a gradual
integration of BSE towards the global financial markets. In another study of [ CITATION
Ali11 \l 1033 ] analyzed the impact of changes in selected microeconomic and
macroeconomic variables on stock returns at Dhaka Stock Exchange. From performing
different test it was concluded that inflation and foreign remittance have negative influence
and industrial production index; market P/Es and monthly percent average growth in market
capitalization have positive influence on stock returns. All the independent variables can
jointly explain 44.48 percent variation in DSE all-share price index.
Another study examine the macroeconomic variables and stock market returns a panel
analysis from selected ASEAN Countries, by utilizing the monthly data over the period of
2005 to 2015, by applying the paned regression techniques and concluded that both stock
market returns are significantly affected by the ER and inflation rate. MS is found to be
insignificant and inflation poses a greater effect and inversely related to the stock market
returns [ CITATION Mac17 \l 1033 ].
Balagobei (2017) also analyzed the macroeconomic variables and stock returns in Srilanka.
This study concluded that the stock market returns is influenced by macroeconomic variables
except money supply in Sri Lanka. Interest rate and factory industry production have negative
influence on stock market return in Colombo Stock exchange while inflation rate and

4
exchange rate have positive influence on stock market return. In [ CITATION Özl12 \l 1033 ]
uses autoregressive distributed lag method is employed for the data spanning from 2005 to
2012. And the result of this research concluded that exchange rate and interest rate are the
most significant factors in the stock price fluctuations of the companies. Stock returns of the
companies in any industry are very sensitive to the changes in exchange rate and interest rate.
Many other researcher research on this relationship under different circumstances and
different time span. [ CITATION Kan08 \l 1033 ] Investigates the role of macroeconomic factors
in explaining Turkish stock returns. A macroeconomic factor model is employed for the
period that spans from July 1997 to June 2005. The macroeconomic factors used by him was
growth rate of industrial production index, change in consumer price index, growth rate of
narrowly defined money supply, change in exchange rate, interest rate, growth rate of
international crude oil price and return on the MSCI World Equity Index.
The arbitrage pricing theory (APT) was introduced by Ross (1976,1977) as a theoretical
alternative to the Capital Asset Pricing Model (CAPM) which introduced by Sharpe (1964),
Lintner (1965) and Mossin (1966). Chen, Roll and Ross (CR&R, 1986), examined the
validity of the APT in the US securities market. They used US macroeconomic variables as
proxies for the underlying risk factors driving stock returns. They found that several of these
macroeconomic variables to be significant in explaining expected stock return, particularly in
industrial production, changes in risk premium, and twist in the yield curve.
The basic need is to identify the set of macroeconomic variables which correspond more
closely with the stock market factors. In this paper we test 13 macroeconomic variables
which are money supply (M2), industrial production (INDPRO), crude oil price(OIL),
consumer price index (CPI), import(IMP), export (EXP), gold price(GOLD), exchange rate
(EXCH), interest rate (INTE), gross domestic product (GDP), foreign reserve (FOR),
unemployment rate (UNEM) and market pressure index (MPI) which is built by the authors
to price the stock of (ISE) which formed in 11 portfolios from the industrial sector because it
represents the significant portion of the traded stocks (it consists 174 out of 259 totally traded
stocks).
Many studies have documented the relationship between macroeconomic variables and stock
returns. Some of these studies have examined this relationship for developed markets such as
USA, Japan and Europe (Chen, Roll and Ross (1986), Chen (1991), Clare and Thomas
(1994), Mukherjee and Naka (1995), Gjerde and Saettem (1999), Flannery and
Protopapadakis (2002)). On the other hand, some other studies investigated the situation for
developing markets, particularly in the East Asia (Bailey and Chung (1996), Mookerjee and
Yu (1997), Kwon and Shin (1999), Ibrahim and Aziz (2003)). There are also studies that
compare the phenomenon for group of countries Cheung and Ng (1998), Bilson, Brailsford
and Hooper (2001), Wongbangpo and Sharma (2002)). These studies have provided different
results. The results have changed according to the macroeconomic factors used, the research
methodology employed and the countries examined. However, the studies concerning the
developing markets mostly focus on the East Asian countries. There is not too much work
done for the developing countries in other parts of the world.
3. Literature Review:
Stocks markets play very important role in the whole financial system in any country of the
world. There are only two sources of finance available for the firm, in which one is equity
and other one is debt. The financial institution provide the debt and equity financing is done
at stock markets. There are many factors that influences the prices and returns of stocks. (D.
Gay, 2008) explored the effects of macroeconomic variables on stock returns. Research was

5
conducted in emerging economies such as India, Brazil and Russia. From the results, there
was a significant relationship between the macroeconomic variables in the study and stock
returns in Emerging economies. Interest rates had a positive impact on stock returns in
emerging economies stock market.
Laichena and Obwogi (2015) explored the effects of macroeconomic variables on stock
returns. The researcher conducted the study in the east African community stock exchange
market. From the results, there was a significant relationship between the macroeconomic
variables in the study and stock returns in East Africa. The findings relating to interest rate
revealed that increase in interest rates had a negative impact on stock returns in East African
stock market. This was an important realization as it established the negative effects increase
in interest rates have on stock returns. The study also found that there was a positive
significant relationship between inflation rate and stock returns in East Africa stock market.
Inflationary pressure, however, is associated with increase in money supply hence increased
investment levels.
In another study (Khan, Khan, Ahmad, & Bashir, 2018) Explored the Impact of
Macroeconomic Factors on Stock Returns. The researcher conducted the study on the KSE
100 index. The results revealed that there was a positive impact of exchange rate on stock
return, while inflation rate and interest rate had a significant negative impact on stock return.
The results of variance decompositions revealed that out of three macroeconomic variables
Inflation rate showed greater forecast error for KSE 100 Index. The study shows that the
macroeconomic variables have a great influence on the stock returns. From the analysis we
concluded that all the companies of Karachi stock exchange will be affected by variation in
macroeconomic factors. The increase in macroeconomic factors may cause decrease in
company stock returns.
In (Nisha, 2016) Impact of Macroeconomic Variables on Stock Returns has been examined.
The study was conducted on the Dhaka stock exchange. From the empirical findings from the
time series and cross sectional analysis of this study imply that a time variation in the risk
exposure from the changes in domestic macroeconomic variables of India do not conforms
timely to the stock prices of DSE. In another research the Impact of selected macroeconomic
variables (inflation, exchange rate, and interest rate) was done on Karachi stock market
returns.
In (Nisha, 2015) Uses Vector Auto regression (VAR) to determine the impact of
macroeconomic variables on the stock returns of Bombay stock exchange (BSE) and declared
that macroeconomic factors such as interest rate, gold price, exchange rate and money supply
is observed for the stock returns, and there a strong influence of the global macroeconomic
factor of the world price index is also observed, which implies a gradual integration of BSE
towards the global financial markets. In another study of (Ali, 2011) analyzed the impact of
changes in selected microeconomic and macroeconomic variables on stock returns at Dhaka
Stock Exchange. After performing several tests it was concluded that inflation and foreign
remittance have negative influence and industrial production index; market P/Es and monthly
percent average growth in market capitalization have positive influence on stock returns.
The results of research indicated that indicated that the present inflation level does not have
any effect on market performance but rather it takes time for the market to react to changes in
the inflation rate. The results of exchange rate indicate that the investors of KSE market not

6
care about the exchange rate variation they prefer to invest in market rather than foreign
currency. (Pervaiz, Masih, & Jian-Zhou, 2018)
Ali (2011) studied the Impact of Micro and Macroeconomic Variables on Emerging Stock
Market Return. The research was conducted on Dhaka Stock Exchange (DSE). The study
have find that Inflation and foreign remittances are negatively related with stock prices
indicating the fact that additional funds flow through inflation and foreign remittances
increase the supply side through additional funds flow in the stock market while demand side
remains unaffected. On the other hand there is a positive relationship is found between stock
price and the remaining independent variables i.e. industrial production index, market
price/earnings and monthly average growth rate of market capitalization. (Jamaludin, Ismail,
& Manaf, 2017) Analyze the relationship between macroeconomic variables which are
inflation, money supply, and exchange rates on stock market returns. This research was
conducted on the three selected ASEAN countries, which include Singapore, Malaysia and
Indonesia. The findings of the study indicates that that both stock market returns of ASEAN
countries are significantly affected by the exchange rate and inflation rate. Money supply is
found to be insignificant. This study also suggest that both Islamic indices and conventional
are affected by the macroeconomic variables with identical pattern.
Singh, Mehta, and Varsha (2011) was also examined the relationship between
Macroeconomic factors and stock returns, which was conducted in Taiwan. They use money
supply, inflation, employment rate and exchange rate as a macroeconomic factor. This reveal
the empirical findings that exchange rate and GDP seem to affect all of the portfolio returns,
except the PBR portfolio of small companies. (Kandir, (2008) Investigated the relationship
between macroeconomic variables, firm characteristics and stock returns. This study was
conducted in Turkey, and the data span in this study was July 1997 to June 2005. The results
reveal that that exchange rate, interest rate and world market return seem to affect all of the
portfolio returns. On the other hand, industrial production, money supply and oil prices do not
appear to have significant effects on stock returns. Inflation rate gives complex results.
The impact of macroeconomic variables on stock market returns in Kenya was analyzed by
(Ouma & Muriu, 2014). Monthly data from 2003-2013 was used, and arbitrage pricing theory
(APT) and capital asset pricing model (CAPM) was applied. OLS reveal that there is a long
run impact of money supply on stock returns in Kenya postulate that an increase in money
supply causes stock market returns to increase. The results also reveal that there is a positive
impact of inflation (CPI) on stock market returns for the ten year period investigated, this
imply that in Kenya stocks cannot be used as a hedge against inflation. (Kibria, et al., 2014)
Investigated the impact of macroeconomic variables on stock market return. This research
was carried out in Pakistan. This study reveal that the inflation has positive and insignificant
relationship with KSE 100 index. The results also that that the stock prices have Granger
Cause with GDP savings, and GDP per capita do not Granger Cause the stock returns.
3.1. Hypothesis of the study:
H1: Inflation has a significant negative impact on stock market returns.
H2: Exchange rate has an insignificant impact on stock market returns.
H3: Interest rate has a significant positive impact on stock market returns.

7
 3.2. Conceptual framework:

INFLATION

STOCK MARKET RETURNS

EXCHANGE RATE

INTEREST RATE

4. Model of the study Explained:

4.1. Inflation and Stock Market Returns:
Inflation effects buying power of consumers, the rise in prices of commodities causes
reduction in buying power of consumers hence they have to spend more money than
the past to buy commodities, consumer are able to purchase only a fewer goods with
the same amount of money because money devalues. Inflation can also impact
corporate profits through higher input costs. This causes corporations to worry about
the future and stop hiring, reducing the standard of living of individuals, especially
those on fixed incomes. Numerous studies have looked at the impact of inflation on
stock returns. Various studies have produced conflicting results when several factors
are taken into account, namely geography and time period. Most studies conclude
that expected inflation can either positively or negatively impact stocks, depending
on the investor's ability to hedge and the government’s monetary policy. With
expected inflation there is negative relationship between inflation and stock returns.
4.2. Exchange Rate and Stock market Returns:
Exchange rate stability and stock market growth are the twin economic objectives
that every country needs to achieve. This is because the financial position of every
economy being it developed or developing can be assessed from its exchange rate
stability. A strong exchange rate is a signal that shows strong and viable economy it
is. While on the other hand a very weak currency is a reflection of a very vulnerable
and weak economy. Hence there is a relationship between Exchange Rate and Stock
Market Returns.
4.3. Interest Rate and Stock Market Returns:

8
 The understanding of relationship between interest rates and the stock market can
help investors understand how changes may affect their investments, and how to
make better financial decisions. Businesses are affected directly as well because they
also borrow money from banks to run and expand their operations. When the banks
make borrowing more expensive, companies may not borrow as much and will pay
higher rates of interest on their loans. Less business spending can slow the growth of
a company it may curtail expansion plans or new ventures, or even induce cutbacks.
There may be a decrease in earnings as well, which, for a public company, usually
affects its stock price negatively.
5. Significance of the Study:
This study is useful for the government for policy making and important decision making
regarding financial institutions. Also the stock market investors can also follow this research
for their future investments in stock market to have an idea regarding the stock market, and
how macroeconomic factors are impacting market, the investors will know about investing in
inflation can turn out to be. And how exchange rates effect our investments. This Study is
also useful for general public for investing in stock market to know about the mechanics of
the market it is not as simple as it seems once they will read this research there will be an idea
about the macroeconomic variables have on prices of the shares they may loss if there is not
enough information available. Companies can also find this study useful for planning and
future investment, many companies want to go public or for the future investments there is
information about macroeconomic factors which provide information about their impact on
markets so that companies can take for account the macroeconomic factors before
investments, for this there should be market well researched material they will need this
study. This research on relationship of macroeconomic factors stock market will serve as a
great pathway for future research in a market like Pakistan where research and detailed and
researched numbers on market are not available. Decision making on the basis of this
research will be easy.

6. Research Questions:
6.1. What is the impact of Inflation on Stock Market Return?
We will find the impact of inflation on Stock Market Return. Inflation effects buying
power of consumers, the rise in prices of commodities causes reduction in buying power
of consumers hence they have to spend more money than the past to buy commodities,
consumer are able to purchase only a fewer goods with the same amount of money
because money devalues. Inflation can also impact corporate profits through higher input
costs. This causes corporations to worry about the future and stop hiring, reducing the
standard of living of individuals, especially those on fixed incomes. Numerous studies
have looked at the impact of inflation on stock returns. Various studies have produced
conflicting results when several factors are taken into account, namely geography and
time period. Most studies conclude that expected inflation can either positively or
negatively impact stocks, depending on the investor's ability to hedge and the
government’s monetary policy. With expected inflation there is negative relationship
between inflation and stock returns.
6.2. What is the impact of Exchange rate on Stock Market Return?
Exchange rate stability and stock market growth are the twin economic objectives that
every country needs to achieve. This is because the financial position of every economy

9
 being it developed or developing can be assessed from its exchange rate stability. A
strong exchange rate is a signal that shows strong and viable economy it is. While on the
other hand a very weak currency is a reflection of a very vulnerable and weak economy.

6.3. What is the Impact of Interest Rate (CPI) on Stock Market Returns?
The understanding of relationship between interest rates and the stock market can
help investors understand how changes may affect their investments, and how to
make better financial decisions. Businesses are affected directly as well because they
also borrow money from banks to run and expand their operations. When the banks
make borrowing more expensive, companies may not borrow as much and will pay
higher rates of interest on their loans. Less business spending can slow the growth of
a company it may curtail expansion plans or new ventures, or even induce cutbacks.
There may be a decrease in earnings as well, which, for a public company, usually
affects its stock price negatively.
7. Problem Statement: The problem statement is that the fluctuating Exchange Rates in
Pakistan which, causes many problems to the investors as well as the Government. The
exchange rates fluctuations cause extra expenditure to the investors of the stock markets,
which decreases returns and increases the expenses. So, there can be a lot about which
research can be done on Macroeconomic variables in general. The research can provide
opportunity for Pakistanis to invest in a way they can minimize risk and get maximum
returns, because if there is more research done more knowledge about market is generated
the more will people know about market. In Pakistan, Securities and Exchange
Commission of Pakistan (SECP) should employ measures to minimize risk to protect the
investors. The CPI (consumer price index) represents inflation which is a major issue in
Pakistan, its effect on the stock price.
8. Objective of the Study:
The Objective of this study to examine the impact of macroeconomic variables (exchange
rate, inflation, interest rate) on stock market returns of Karachi Stock Exchange. We will
achieve that about stock market position of the companies and how effective are the
government policies are that needs to find out through the inflation rates and interest
rates. The importance of macroeconomic variables is an important factor in investment
decisions which is studied in this research. Once the research is done it will be useful for
stock market investors and policy makers of the government and general public.
9. Theories used to explain model
9.1. Arbitrage pricing theory (APT):
In this paper we use the Arbitrage pricing theory (APT) developed by Ross (1976).
Chen et al. (1986) first illustrated that economic forces affect discount rates, the
ability of firms to generate cash flows, and future dividend pay-outs, provided the
basis for the belief that a long-term equilibrium existed between stock prices and
macroeconomic variables.
Arbitrage Pricing Theory is more flexible than the CAPM. The CAPM only takes
into account one factor, Market Risk while the APT formula has multiple factors. It
takes a considerable amount of research to determine how sensitive a security is to
various macroeconomic risks. The factors as well as how many of them are used are
subjective choices, which means investors will have varying results depending on

10
 their choice. However, four or five factors will usually explain most of a security's
return. APT factors are the systematic risk that cannot be reduced by the
diversification of an investment portfolio. The macroeconomic factors that have
proven most reliable as price predictors include unexpected changes in inflation,
gross national product (GNP), corporate bond spreads and shifts in the yield curve.
Other commonly used factors are gross domestic product (GDP), commodities prices,
market indices, and exchange rates.
The APT model defines that the forecasted rate of return on assets depends on
volatility to macroeconomics variables which points out that factor risk takes more
significant in assets pricing (Gilles et.al 1990). APT is comparatively a moderate
diverse technique to analysis the assets prices model. It may cover different non
market variables which influence the assets prices. It bases on the one price law: “two
assets which are the identical may not be sold at various prices. Advancement is the
utility and its assumption which were using by CAPM model are not essential”.
(Elton et al. 2003) Arbitrage pricing theory (APT) is based on the idea that an asset's
returns can be predicted using the linear relationship between the asset’s expected
return and a number of macroeconomic variables that capture systematic risk. It is a
useful tool for analysing portfolios from a value investing perspective, in order to
identify securities that may be temporarily mispriced. In the context of APT, macro-
economic factors are used as measure of economy wide risk factors. Asset pricing
theory says that all the factors which affects the prospect investment choices in a risk
averse economy therefore should produce risk premier (Merton, 1972; Ross, 1976).
Economic forces influence the Stock returns, and various economic forces (N. F.
Chen, Roll, & Ross, 1986). Flannery and Protopapadakis (2002) says that firm’s cash
flows affect the macroeconomic factors. The APT model indicates that return of
assets is the linear function of different macroeconomic variables and the changes
occur in these variables are represented by specific factor’s coefficient.
In their recent study to validate the model, (Fama & French, 2004), fronts the
portfolio theory that investors choose portfolios that are said to be mean-variance-
efficient, and found along the efficient frontier for portfolios. The CAPM assumes
that any portfolio that is mean-variance-efficient and lies on the efficient frontier is
also equal to the market portfolio. The implications of this, according to the authors,
are that the relation between risk and expected return for any efficient portfolio must
also hold for the market portfolio, if equilibrium is to be maintained in the asset
market.
9.2. Capital Asset Pricing Model:
According to the capital asset pricing model (CAPM), the marketplace compensates
investors for taking systematic risk but not for taking specific risk. This is because
specific risk can be diversified away. When an investor holds the market portfolio,
each individual asset in that portfolio entails specific risk, but through diversification,
the investor’s net exposure is just the systematic risk of the market portfolio. In
(Ross, 1976), where the return on an asset is specified as a function of a number of
risk factors common to that asset class. The model assumes that investors take
advantage of arbitrage opportunities in the broader market; thus, an asset’s rate of
return is a function of the return on alternative investments and other risk factors. The
APT in contrast to CAPM acknowledges several sources of risk that may affect an

11
 asset’s expected return. The model, as with the CAPM, is subject to certain
assumptions; the first of these being that investors may borrow and lend at the risk-
free rate, there are no taxes and short selling of securities is unrestricted. The second
assumption assumes that a wide variety of securities exist, thus risk unique to those
securities may be diversified away, and lastly, investors are risk averse who aim to
maximize their wealth.
CAPM has its basis in the construction of an efficient market portfolio that
maximizes return, given a level of risk. The expected return of an individual security
is a function of its risk covariance with the market. The model stipulates that the
expected return on a stock is determined by the risk free interest rate and a risk
premium which is a function of the stock’s responsiveness to the overall movement
in the market that is its beta coefficient.
In more recent empirical works on asset pricing has identified a number of variables
that help explain cross sectional variation in stock returns in addition to the market
risk variable. Roll (1977) argued that the market portfolio should in theory include all
types of assets that are held by anyone as an investment including works of arts, real
estate, human capital etc. but said, in practice, such a market portfolio is
unobservable and people usually substitute stock index as a proxy for the true market
portfolio. Unfortunately, it has been shown that this substitution is not innocuous and
can lead to false inferences as to the validity of the CAPM. It has been said that due
to the non observability of the true market portfolio, the CAPM might not be
empirically testable.
The CAPM is seen as parsimonious and commonly employed by equity analysts, but
requires a precious identification of the portfolio against which the asset is compared.
On the other hand, Mosley and Singer(2007) contends that, APT accommodates
multiple sources of risk and alternative investment, the model suffers from a similar
challenge of identification since many factors, both international and domestic could
influence an assets performance. The model, as with the CAPM, is subject to certain
assumptions; the first of these being that investors may borrow and lend at the risk-
free rate, there are no taxes and short selling of securities is unrestricted. The second
assumption assumes that a wide variety of securities exist, thus risk unique to those
securities may be diversified away, and lastly, investors are risk averse who aim to
maximize their wealth.
CAPM and APT can be jointly workable and usable in a model even if the return on the
market portfolio is not one of the factors because of the compatibility between the two CAPM
and APT, even if the factors are not Portfolio return at all. Therefore in this study will employ
these two theories, CAPM and APT to determine the impacts of macroeconomic variables
(interest rate, inflation rate and exchange rate) on the returns KSE 30 index.

10. Conclusion:
The stock markets play very essential role in the growth and development of the
economy, because efficient stock market engage the domestic and foreign investors. The
performance of the capital market is can be measured from the index which is effected by
different factors such as political social and macroeconomic. The purpose of this research
is to empirical investigate the impact of macroeconomic factors which include interest
rate, inflation rate and exchange rate on stock market returns of Karachi stock exchange

12
30 index. The quarterly data of ten year from 2008 to 2018 was used in the study. All the
test i.e. descriptive statistics, correlation, and regression analysis execute on quarterly
basis. The results revealed that inflation and interest rate has a significant impact on stock
market returns, while exchange rate has an insignificant impact on stock market returns of
KSE 30 index. The study show that there is an impact of macroeconomic factors on stock
markets.

13
References:
Ali, M. B. (2011). Impact of micro and macroeconomic variables on emerging stock market
return: A case on Dhaka stock exchange (DSE). Interdisciplinary Journal of Research in
Business, 1(5), 8-16.
Ali, M. B. (2011). Impact of micro and macroeconomic variables on emerging stock market
return: A case on Dhaka stock exchange (DSE). Interdisciplinary Journal of Research in
Business, 1(5), 8-16.
Bailey, W., & Chung, Y. P. (1996). Risk and return in the Philippine equity market: A
multifactor exploration. Pacific-Basin Finance Journal, 4(2-3), 197-218.
Bilson, C. M., Brailsford, T. J., & Hooper, V. J. (2001). Selecting macroeconomic variables
as explanatory factors of emerging stock market returns. Pacific-Basin Finance Journal, 9(4),
401-426.
Chen, N. F., Roll, R., & Ross, S. A. (1986). Economic forces and the stock market. The
Journal of Business, 59 (3), 383-403.
Flannery, M. J., & Protopapadakis, A. A. (2002). Macroeconomic factors do influence
aggregate stock returns. The Review of Financial Studies, 15 (3), 751-782.
Gay Jr, R. D. (2008). Effect of macroeconomic variables on stock market returns for four
emerging economies: Brazil, Russia, India, and China. International Business & Economics
Research Journal (IBER), 7(3).
Jamaludin, N., Ismail, S., & Ab Manaf, S. (2017). Macroeconomic variables and stock
market returns: Panel analysis from selected ASEAN countries. International Journal of
Economics and Financial Issues, 7(1), 37-45.
Kandir, S. Y. (2008). Macroeconomic variables, firm characteristics and stock returns:
Evidence from Turkey. International research journal of finance and economics, 16(1), 35-45.
KHAN, M. T., KHAN, A., AHMAD, D. A., & BASHIR, O. U. (2018). Impact of
Macroeconomic Factors on Stock Returns of KSE 100 Index. Policy.
Kibria, U., Mehmood, Y., Kamran, M., Arshad, M. U., Perveen, R., & Sajid, M. (2014). The
impact of macroeconomic variables on stock market returns: a case of Pakistan. Research
Journal of Management Sciences. ISSN, 2319, 1171.
Laichena, K. E., & Obwogi, T. N. (2015). Effects of macroeconomic variables on stock
returns in the East African community stock exchange market. International journal of
education and research, 3(10), 305-320.
Merton, R. C. (1972). An intertemporal capital asset pricing model. Econometrica, 41 , 867-
887.
Mookerjee, R., & Yu, Q. (1997). Macroeconomic variables and stock prices in a small open
economy: The case of Singapore. Pacific-Basin Finance Journal, 5(3), 377-388.

14
Nisha, N. (2016). Macroeconomic determinants of the behaviour of Dhaka Stock Exchange
(DSE). International Journal of Asian Business and Information Management
(IJABIM), 7(1), 1-17.
Nisha, N. (2015). Impact of macroeconomic variables on stock returns: evidence from
Bombay Stock Exchange (BSE). Journal of Investment and Management, 4(5), 162-170.
Ouma, W. N., & Muriu, P. (2014). The impact of macroeconomic variables on stock market
returns in Kenya. International Journal of Business and Commerce, 3(11), 1-31.
Pervaiz, J., Masih, J., & Jian-Zhou, T. (2018). Impact of macroeconomic variables on
Karachi stock market returns. International Journal of Economics and Finance, 10(2), 28.
Reisman, H. (1988). A general approach to the arbitrage pricing theory(APT). Econometrica:
Journal of the Econometric Society, 473-476.
Ross, S. A. (1976). The arbitrage theory of capital asset pricing. The Journal of Economic
Theory, 13 , 341-360.
Singh, T., Mehta, S., & Varsha, M. S. (2011). Macroeconomic factors and stock returns:
Evidence from Taiwan. Journal of economics and international finance, 3(4), 217.
Wongbangpo, P., & Sharma, S. C. (2002). Stock market and macroeconomic fundamental
dynamic interactions: ASEAN-5 countries. Journal of asian Economics, 13(1), 27-51.

15
 Appendix:
Area of Research
The purpose of this study to examine the impact of macroeconomic variables on stock market
returns of KSE 30 index. An index which based only on the free-float of shares, rather than
on the basis of paid-up capital. The rapid growth in the equity market has fascinated investors
as well as researchers, to study the volatile behaviour of stock market returns as a result of
different macroeconomic factors. Equity market is not only an avenue for the investors but
also a source of capital for the firms. The stock returns from equity market are highly
influenced by multiple factors such as performance of that particular stock, overall market
conditions, prevailing economic conditions, etc. The study of aforesaid variables is important
enough to analyse the performance of the stocks. In this regard, the causal relationship
between macroeconomic factors and volatility in stock market returns is the part of many
researches. This type of studies enables the investors to make effective and efficient
investment decisions and also helps the firms to improve their market worth. A
macroeconomic factor is a characteristic, trend or condition that comes from or applies to a
broad aspect of an economy rather than a certain population. In contrast to macroeconomics,
microeconomics is the branch of economics that studies the behaviour of individuals and
firms in making decisions and the interactions among these individuals and firms in
narrowly-defined markets.

16