Stock Market and Macroeconomic Behavior: Evidence from Karachi Stock Exchange (KSE)

An impressive body of research has documented that movement in stock prices are highly sensitive to changes in the macroeconomic variables of an economy. Past empirical studies have examined this relationship across different stock markets by either outlining the influence of only domestic factors or a few global variables. A recent phenomenon has been the shift of academic interest to the emerging economies to investigate this presumed linkage by focusing more on global factors due to the trend of globalization. The aim of this paper is therefore to examine the influence of only global macroeconomic factors upon stock returns in the emerging stock market of Pakistan. By employing Vector Error Correction Model (VECM), findings indicate that significant influence of the global macroeconomic factors of the international interest rates and the world price index is observed, which implies a gradual integration of KSE towards the global financial markets. Limitations and implications for practice and research are also discussed.