Impact of Macroeconomic Variables on Stock Prices: Empirical Evidence from Karachi Stock Exchange, Pakistan

Movement of stock indices is responsive to changes in macroeconomic fundamentals. The objective of this study is to find the relationship between macroeconomic variables and stock prices in Karachi Stock Exchange (KSE), Pakistan. The study considers annual data of several macroeconomic variables from 1998 to 2009: gross domestic product, exports, consumer price index, money supply M2, exchange rate, foreign direct investment and oil prices. The stationarity of data is checked through Augmented Dickey Fuller test. All variables are stationary at zero lag. Multiple regression analysis with Fixed Effects Model is then used. Results show that gross domestic product and exchange rate positively affect stock prices while consumer price index negatively affects stock prices. The results of export, money supply M2, foreign direct investment and oil prices were insignificant. This study will facilitate investors in taking effective investment decisions by estimating the expected trends in macroeconomic variables.