The impacts of macro-economic variables on Pakistan Karachi stock exchange

This study examines the causal relationship between the Karachi Stock Exchange (KSE) and fundamental macro-economic variables. Monthly data for the time period July 2005 - April 2014 has been considered. Inflation (CPI), Foreign exchange rates, GDP, Interest rates, gold prices and oil prices in Pakistan are chosen as macroeconomic variables. Johansen and Juselius (1990) Cointegration Analysis, Granger Causality Test under VECM framework has been employed along with the Sims (1980) Variance Decomposition and Impulse Response Function Analysis. The findings suggest that there is long run cointegration among the macro economic variables and KSE 100. It seems that all macro economic variables "Granger cause" the KSE 100 index in the long-run; whereas only foreign exchange rates "granger cause" KSE 100 in the short-run.