The impact of Interest rate and Exchange rate on Stock Prices. A Pakistani perspective. (July 2007-March 2012)

Muhammad Taimur

Introduction• Interest rate and exchange rate are the key

macroeconomic variables of the economy (Ahmed, Raoof, & Rehman, 2010).

• Changes in these variables can affect the profitability and returns of the investors.

• Emergence of new capital markets, gradual abolishment of capital inflow barriers and adaptation of flexible exchange rate has highlighted the need (Okpara & Odionye, 2012).

Problem Statement

To investigate the impact of Interest rate and Exchange rate on Stock prices in Pakistan.

Literature ReviewResearch Title

Stock Prices and Exchange Rates: Are they Related?Evidence from South Asian Countries.

(Rasheed & Naeem, 2002)

Exchange rate and stock price interactions inemerging financial markets: evidence on India,Korea, Pakistan and the Philippines.

(Abdalla & Murinde, 1997)

Dynamic relationship between stock prices and exchange rates for G-7 countries.

(Nieha & Leeb, 2001)

Linkage between Stock Market Prices and Exchange Rate: A Causality Analysis for Pakistan.

(Farooq & Keung, 2002)

Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model.

(Kim, 2003)

The determinants of the variability of stock market prices.

(Grossman & Shiller, 2001)

The Exchange-Rate Exposure of U.S. Multinationals.

(Jorion, 1990)

A bivariate causality between stock prices and exchange rates: evidence from recent Asian flu

(Granger, Huang, & Yang, 2000)

Estimating the effects of Interest Rates on Share Prices Using Multi-scale Causality Test in Emerging Markets: Evidence from Turkey

(Çifter & Ozun, 2002)

 The Relationship between Exchange Rate and Stock Prices during the Quantitative Easing Policy in Japan 

(Kurihara, 2006)

Analysis of the relationship between exchange rate and stock prices : Evidence from Nigeria

(okpara & Odionye, 2012)

Is exchange rate volatility influenced by stock return volatility? Evidence from the US, the UK and Japan 

(Kansas, 2002)

Relationship between Interest Rate and Stock Price: Empirical Evidence from Developed and Developing Countries

(Alam & Uddin, 2009)

Theoretical Framework

Exchange Rate

Interest Rate

Stock Prices

Independent Variables Dependent

Variable

Hypothesis

H1O : Exchange rate does not effect stock prices.H1: Exchange rate effects stock prices.

H2O: Interest rate does not effect stock prices.H2: Interest rate significantly effects stock prices.

Objective of the Research

This research aims to investigate the

effect of exchange rate on stock prices

and interest rate on stock prices.

Significance of the Research

•This research can help SBP to adjust interest rate to attract local and foreign investors.

•This research can be used by other developing countries as well.

• It can serve as a base for conducting further studies and as a secondary data.

Scope of the study

•The study is limited only to the financial

sector of KSE 100 however it can be

applied to the financial sector in other

countries as well.

Methodology

•Population includes the financial services sector of KSE 100.

•Randomly selected sample including 7 financial companies.

Data Collection•The study uses monthly data for the period

July 2007 – March 2012.•Stock prices will be observed from KSE 100 .•90 days T-Bill rate is selected as a

representative of interest rate (Zafar, Urooj, & Durrani, 2008). It will be taken from SBP website

http://www.sbp.org.pkExchange rate will be taken from SBP website

as well.

Regression model

(Zafar, Urooj, & Durrani, 2008)

Referencing • Abdalla, I., & Murinde, V. (1997). Exchange rate and stock price

interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines. Applied Financial Economics .

• Ahmed, I., Raoof, A., & Rehman, R. u. (2010). Do Interest Rate, Exchange Rate effect Stock Returns? A Pakistani perspective. International Research Journal of Finance and Economics .

• Alam, M., & Uddin, G. (2009). Relationship between Interest Rate and Stock Price: Empirical evidence from developed and developing countries. International journal of business and management .

• Çifter, A., & Ozun, A. (2002). Estimating the effects of Interest rates on share prices using multi-scale causality test in emerging markets: Evidence from Turkey. The quarterly review of economics and finance .

• Farooq, M. T., & Keung, W. W. (2002). Linkage between stock market prices and exchange rate: A causality analysis for Pakistan.

• Granger, C., Huang, B. N., & Yang, C. W. (2000). A bivariate causality between stock prices and exchange rates: evidence from recent Asian flu. The Quarterly Review of Economics and Finance , 337-354.

• Grossman, S. J., & Shiller, R. J. (2001). The determinants of the variability of stock market prices. NBER working paper series.

• Jorion, P. (1990). The exchange-rate exposure of U.S. multinationals. The journal of business , 331-345.

• Kansas, A. (2002). Is exchange rate volatility influenced by stock return volatility? Evidence from the US, the UK and Japan. Applied Economics Letters , 501-503.

• Kim, k.-h. (2003). Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model. Review of Financial Economics , 301-313.

• Kurihara, Y. (2006). The relationship between exchange rate and stock prices during the Quantitative Easing Policy in Japan. INTERNATIONAL JOURNAL OF BUSINESS .

• Nieha, C. C., & Leeb, C. F. (2001). Dynamic relationship between stock prices and exchange rates for G-7 countries. The quarterly review of economics and finance , 477-490.

• Okpara, g. c., & Odionye, J. C. (2012). Analysis of the relationship between exchange rate and stock prices: Evidence from Nigeria. International Journal of Current Research , 4 (03), 175-183.

• Rasheed, A., & Naeem, M. (2002). Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries. The Pakistan Development Review , 535-550.

• Zafar, N., Urooj, f., & Durrani, T. K. (2008). Interest rate volatility and stock return and volatility. European Journal of Economics, Finance and Administrative Sciences .