International Journal of Management (IJM)

Volume 12, Issue 4, April 2021, pp.8-14, Article ID: IJM_12_04_002

Available online at http://iaeme.com/Home/issue/IJM?Volume=12&Issue=4
ISSN Print: 0976-6502 and ISSN Online: 0976-6510
DOI: 10.34218/IJM.12.4.2021.002

© IAEME Publication Scopus Indexed

FACTORS EFFECTING STOCK MARKET

INDEX IN PSE
Sumra Haleem Shaikh
Department of Management Science, SZABIST, Hyderabad, Pakistan

Raheel Mumtaz
Assistant Professor, Faculty of Economics & Management Sciences,
Government College University, Faisalabad, Pakistan

Maria Shaikh
Associate Professor, IBA, University of Sindh, Jamshoro, Pakistan

Aisha Bashir Shah

Professor, IBA, University of Sindh, Jamshoro, Pakistan

Mahboob Ullah*
Associate Professor, Khurasan University, Nangarhar, Afghanistan

*Corresponding Author

ABSTRACT
This paper examined the role of macroeconomic factors on stock indices. This study
has measured economic factors with interest rate, foreign exchange currency,
international trade, foreign exchange reserve. Monthly data are deployed of all the
factors from January 2010 to April 2020. Pakistan Stock Exchange (PSE) index monthly
data is used as dependent factor. The outcomes of multiple regression analysis indicated
that there was a significant impact of international trade and foreign exchange reserve
on PSE indices whereas exchange rate was relatively less important for the movement
of stock indices as per the data for the given period. Finally, w e could infer that there
is still a lot to cover in this domain as we have also considered few selective factors and
there can be more such factors which affects the Indices performance.
Key words: Economic Factors, Stock Index, Pakistan Stock Exchange.
Cite this Article: Sumra Haleem Shaikh, Raheel Mumtaz, Maria Shaikh, Aisha Bashir
Shah and Mahboob Ullah, Factors Effecting Stock Market Index in PSE, International
Journal of Management (IJM), 12(4), 2021, pp. 8-14.
http://iaeme.com/Home/issue/IJM?Volume=12&Issue=4

http://iaeme.com/Home/journal/IJM 8 editor@iaeme.com
 Sumra Haleem Shaikh, Raheel Mumtaz, Maria Shaikh, Aisha Bashir Shah and Mahboob Ullah

1. INTRODUCTION
Every Economy’s financial position is highly dependent on movement of stock indices. If they
are performing good, then economy will also see the booming trend else it creates a troublesome
situation for them. At the same time capital indexes are very susceptible to macro-economic
activities.
From the beginning on 1990 Pakistan has taken numerous steps for economic liberalization
and numerous steps were taken to develop the stock market such as opening it for international
investors, introducing regulators which helped in growth in creating the global presence of
Pakistan stock market but at the same time it exposed our market to global factors
/macroeconomic factors.
Macroeconomic activities are those that are termed as large scale economic factors at
national and international level. It is termed that domestic factor affect the stock indices but in
globally integrated environment any movement in the international economy affects the stock
movement in our country. For example, when rupee Depreciates it affects adversely to various
companies that are dependent on imports for their manufacturing activities on the other hand
the effect of rupee depreciation is good for export based companies as it brings more profits for
them hence their market capitalization increases.
In this paper we are Analyzing correlation between Stock Indices (PSE) and Macro
economic factors:
• Interest Rate (Repo rate)
• Foreign exchange reserves
• International trade
• Foreign exchange
In order to control the liquidity, the economy, State Bank of Pakistan (SBP) comes up with
certain monetary measure and interest rate changes is one of them. It is a rate through which
central bank provide lending to banks for short period to meet their liquidity shortage and to
control inflation in the economy. As this rate affects the lending rate of the banks which in turn
affects the balance sheet of the big corporate who has availed the loan from these banks and
eventually it affects company’s stock movement in the market. International trade is very
important macroeconomic factor. Being an import driven economy trade deficit/Surplus has
strong impact on stock indexes of our country.
Hence, we are using Multiple regression techniques to analyses the relationship between
independent and dependent variables. Where:
Dependent Variable: PSE monthly data
Independent Variables: Interest rate, foreign exchange reserve, foreign currency,
International trade.

1.1 Research Problem

There are several studies has been conducted on few macroeconomic factors in various counties
across the globe. But these factors have not been considered together in PSE. Analysis with
respect to international trade and reserves were not very substantial. Also, Since Stock exchange
and macro-economic factors are very fluctuating in nature and it changes with the change in
global and economic conditions hence timely review and analysis of this area is must.

http://iaeme.com/Home/journal/IJM 9 editor@iaeme.com
 Factors Effecting Stock Market Index in PSE

1.2 Objectives
• To determine major macroeconomic variables.
• To examine the relationship with stock index.
• To Analyze correlation of the data availed.

1.3 Hypotheses
H0 : Interest rate has no significant effect on stock indices.
H1 : Interest rate has a significant effect on stock indices.
H0 : currency exchange rate doesn’t affect the movement of Stock Indices
H1 : currency exchange rate does affect the movement of Stock Indices.
H0 : Foreign exchange reserve has no impact on stock indices.
H1 : Foreign exchange reserve has an impact on stock indices.
H0 : Null hypothesis: There is no major effect of International trade on stock indices.
H1 : There is a major effect of International trade on stock indices.

2. REVIEW OF LITERATURE
There has been a common belief that the local factors and events affect more to emerging
market than global factor hence in 1999 the researchers (Bilson, Brails & Hooper, 2001) carried
out the research and aimed to address this question and they found quite moderate evidence of
this argument stating local factors are more important than global factors. Also there was a
belief that movement in financial market in developed and developing countries are different
They react differently to macroeconomic variables which was reviewed by Watanapalachaikul
(2003).
Many researchers have conducted a study on macroeconomic factors like, foreign exchange,
interest rate and money supply, inflation, industrial productions etc. over the course of time and
developed a strong correlation with stock indexes (Ibrahim, 1999; Mishra, 2004; Maysami,
Howe, & Rahmat, 2005; Ullah, Shaikh, Channar, & Shaikh, 2021). there are very few
researchers who did study on international trade as a macroeconomic factor (Adjasi, Harvey, &
Agyapong, 2008) did this on Ghana stock exchange which said Increase in trade deficit will
lead to fall in stock index and vice versa. It simply means, high trade deficit shows a lesser
confidence about the local production amongst the consumer and hence the prices of company’s
shares reduce and they don’t even see more volatility as people have lost hopes with these
companies and are not willing to buy these stocks.
As there are several researchers who concluded a strong correlation between foreign
currency movement and stock indices (Mishra, 2004; Ibrahim, 1999) etc. but at the same time
researcher (Olweny, & Omondi, 2011). Who analyzed the effect of macroeconomic factor’s
effect on NSE stock index from 2001 to 2010? and his findings depicted that correlation
between stock index & exchange rate is relatively low. The output generated in our research
has also shown the similar results. Singh, Mehta, & Varsha, (2011) has done study on portfolios
rather than on stock indices with certain crucial macroeconomic factors namely GDP,
employment rate and for portfolio construction they used PE ratio, yield, market capitalization
.and their findings revealed that GDP and exchange rate affects the returns of all portfolios.
Whereas money supply, inflation & employment rate has a negative relation with medium as
well as big portfolios.
Our paper also focusing on several macro-economic factors which are not used frequently
on Pakistan stock indices such as foreign exchange reserve, interest rate and international trade.

http://iaeme.com/Home/journal/IJM 10 editor@iaeme.com
 Sumra Haleem Shaikh, Raheel Mumtaz, Maria Shaikh, Aisha Bashir Shah and Mahboob Ullah

Also the studies shown the high correlation with International trade (deficit) and least with
foreign exchange currency.

3. RESEARCH METHODOLOGY
Research Type: Qualitative and Quantitative Research
Here we will be examining the dynamic relationship between major micro economic variables
i.e., foreign currency, foreign currency reserve, interest rate and international trade.
We have used multiple regression model in order to analyze the correlation. It is used when
we are predicting the value of one dependent variable which is based on the value of more than
one dependent variables. In our case dependent variable is PSE and independent variables
are macroeconomic factors. The data used is a monthly data from Jan, 2010 to April 2020.

Table 1 Causal relationship between Variables and stock index movement

Variables Mean Standard Deviation N
Foreign Exchange Reserve 2138899 624001.5 124
Interest Rate 6.787097 1.036212 124
International Trade 74578.589 23018.0108 124
Exchange Rate 60.5714702 8.86332359 124
We have taken a data for 124 months (i.e., from Jan 2010 to April 2020 which is represented
by N) to calculate the above table and run the multiple regression analysis.

Table 2 Data description Table

Variable Definition Author Name Source of data
Name
PSE Index It is a stock market index Multiple authors PSE website (PSE.COM)
(Monthly with many largest industrial
data) sectors
in the economy
Interest rate Repo rate is the rate at which Watanapalachai SBP Website
Central bank provides loan to kul, S. (2003).
commercial banks for short
duration.
Foreign It consists of cash, other Ibrahim, M. SBP Website
Exchange assets and reserves are held (1999)
reserve by central bank or any
monetary authority of the
nation to maintain the
balance of trade, inflation
and currency movement of
the
country.
International l It is the exchange of goods Adjasi, C., SBP website
trade deficit and services across Harvey, S. K., & (https://dbie.SBP.org.in/DBIE/dbie.SBP?
international borders in order Agyapong, D. sit e=statistics
to fulfil us A. (2008).
industrial requirements.
Foreign It is a currency (USD) Olweny, T., & https://excelrates.com/historical-
exchange against the exchange of Omondi, K. exchange-rates/USD-PKR
currency PKR. (2011).

http://iaeme.com/Home/journal/IJM 11 editor@iaeme.com
 Factors Effecting Stock Market Index in PSE

Table 3 Descriptive Statistics output

Particular Output
Multiple R 0.939275235
R square 0.882237968
Adjusted R 0.87827958
Observations 124

Table 4
Anova Output
df SS MS F Significance F
Regression 4 6148951056 1.54E+09 222.8781128 2.83866E-54
Residual 119 820768318.5 6897213
Total 123 6969719375

Table 5 Multiple Regression output: Testing at 90% significance level

Variables P value Significance
Foreign Exchange Reserve 1.84996E-13 ***
Interest Rate 0.160996625 *
International Trade 0.000160724 ***
Exchange Rate 0.361369748

4. ANALYSIS
We have taken a data for 124 months (i.e., from Jan 2010 to April 2020 which is represented
by N) to calculate the above table and run the multiple regression analysis. As per the output
provided in the methodology section, Mean and standard deviation of foreign exchange reserve
and international rate was very high it showed the significant variability of the data. Whereas
Variability of exchange rate was relatively less and variability of interest rate was least. In fact,
the data has shown a negative correlation between interest rate and stock index
(-0.51) it means whenever interest rate rises it shows a negative impact on companies as
they have to pay more for their credits availed from banks hence their stock prices reduces and
vice versa. Also, a positive correlation between foreign exchange reserve with PSE movement
(0.92) as whenever there is increase in foreign currency reserve it shows the strong economic
condition of the country hence it increases the chances of prosperity of companies in that
economy hence it creates positive correlation.
The descriptive statistics output was generated after applying regression analysis on 124
observations. R Square which was 88.22% denoted the accuracy of the test. but R square was
suitable if we had linear regression and here we performed multiple regression model hence we
would consider Adjusted R square (87.82%) for checking the accuracy of the given model. This
coefficient shows how well our regression line was approximating with the data. The range of
R square is 0 to 1 .ad higher the output, better the model in explaining our correlation.
As we were testing the model at 95% significance level so, In the above ANOVA output
we could see that Significance F was way below 0.05 (it is 2.83866E-54) hence we could reject
the null hypothesis and go ahead with our regression study for further details.
Finally, the regression model output indicates the significant level of each independent
variable on dependent variable. We have considered significance level at 90%. It says that
foreign exchange reserve and international trade has a very high significant impact on the
changes in PSE index as their P value was way below 0.1. Whereas interest rate has a relatively
low impact on PSE index. and exchange rate has very less significance for PSE stock

http://iaeme.com/Home/journal/IJM 12 editor@iaeme.com
 Sumra Haleem Shaikh, Raheel Mumtaz, Maria Shaikh, Aisha Bashir Shah and Mahboob Ullah

movements, also this kind of correlation has also been proved by Olweny, & Omondi, in their
research paper published in 2011. where they did study on correlation between Nairobi stock
exchange and currency rate and found very low relationship between them.
Model: This model shows how changes in macro-economic factors affects the changes in
PSE indices. Which is supported by regression test run through using these data points.

Figure 1

5. CONCLUSION
Pakistan, being an import driven nation, the outcomes indicated that international trade deficit
and foreign exchange reserve plays a significant role in driving the stock index outputs as a
level of reserve increases security and stability of our currency in international market which in
turn increases the demand for Pakistani stocks and bring positive impact on PSE index.

6. FUTURE RESEARCH RECOMMENDATIONS

There is still a scope for future study. We tried to cover best possible macroeconomic variable
to see their impact on stock market. Still the list of these variables are quite exhaustive and there
is lot more to analyze and study to about the relationship of economic activities. Overall, we
believe that this paper would be useful for finance literatures as well for investors to do their
market analysis.

REFERENCES
[1] Abugri, B. A. (2008). Empirical relationship between macroeconomic volatility and stock
returns: Evidence from Latin American markets. International Review of Financial
Analysis, 17(2), 396-410.
[2] Adjasi, C., Harvey, S. K., & Agyapong, D. A. (2008). Effect of exchange rate volatility on
the Ghana stock exchange. African Journal of Accounting, Economics, Finance and
Banking Research, 3(3).
[3] Agrawal, G., Srivastav, A. K., & Srivastava, A. (2010). A study of exchange rates
movement and stock market volatility. International Journal of Business and Management,
5(12), 62.
[4] Ahmad, M. I., Rehman, R., & Raoof, A. (2010). Do interest rate, exchange rate effect stock
returns? A Pakistani perspective. International Research Journal of Finance and Economics,
50, 146-150.

http://iaeme.com/Home/journal/IJM 13 editor@iaeme.com
 Factors Effecting Stock Market Index in PSE

[5] Alam, M. D., & Uddin, G. (2009). Relationship between interest rate and stock price:
empirical evidence from developed and developing countries. International Journal of
Business and Management (ISSN 1833-3850), 4(3), 43-51.
[6] Ali, I., Rehman, K. U., Yilmaz, A. K., Khan, M. A., & Afzal, H. (2010). Causal relationship
between macro-economic indicators and stock exchange prices in Pakistan. African Journal
of Business Management, 4(3), 312-319.
[7] Amarasinghe, A. (2015). Dynamic relationship between interest rate and stock price:
Empirical evidence from colombo stock exchange. International Journal of Business and
Social Science, 6(4).
[8] 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.:
[9] Fukuda, S. I., & Kon, Y. (2012). Macroeconomic impacts of foreign exchange reserve
accumulation: Theory and international evidence. In Monetary and Currency Policy
Management in Asia. Edward Elgar Publishing.
[10] Gulati, D., & Kakhani, M. (2012). Relationship between stock market and foreign exchange
market in Pakistan: An empirical study. Pacific Business Review International, 5(5), 66-71.
[11] Hamrita, M. E., & Trifi, A. (2011). The relationship between interest rate, exchange rate
and stock price: A wavelet analysis. International Journal of Economics and Financial
Issues, 1(4), 220.
[12] Jawaid, S. T., & Ul Haq, A. (2012). Effects of interest rate, exchange rate and their
volatilities on stock prices: evidence from banking industry of Pakistan. Theoretical &
Applied Economics, 19(8).
[13] Maysami, R. C., Howe, L. C., & Rahmat, M. A. (2005). Relationship between
macroeconomic variables and stock market indices: Cointegration evidence from stock
exchange of Singapore's All-S sector indices. Jurnal Pengurusan (UKM Journal of
Management), 24.
[14] Mishra, A. K. (2004). Stock market and foreign exchange market in Pakistan: are they
related? South Asia Economic Journal, 5(2), 209-232.
[15] Nath, G. C., & Samanta, G. P. (2003). Relationship between exchange rate and stock prices
in Pakistan-an empirical analysis. Available at SSRN 475823.
[16] Olweny, T., & Omondi, K. (2011). The effect of macro-economic factors on stock return
volatility in the Nairobi stock exchange, Kenya. Economics and Finance review, 1(10), 34-
48.
[17] Renmei, Q. Q. Z. L. Y. (2009). On the Effectiveness of Foreign Exchange Reserve and
Monetary Sterilization on the Inflation [J]. Journal of Financial Research, 5.
[18] SBP Website. (2020). https://www.sbp.org.pk/
[19] Sharma, G. D., & Mahendru, M. (2010). Impact of macro-economic variables on stock
prices in Pakistan. Global Journal of Management and Business Research, 10(7).
[20] Singh, T., Mehta, S., & Varsha, M. S. (2011). Macroeconomic factors and stock returns:
Evidence from Taiwan. Journal of economics and international finance, 3(4), 217-227.
[21] Ullah, M., Shaikh, M., Channar, P., & Shaikh, S., (2021). Financial forecasting: an
individual perspective. International Journal of Management, 12(3), 60-69.

http://iaeme.com/Home/journal/IJM 14 editor@iaeme.com