Topic:

Introduction of impact of interest rate on stock market

Name: Gulzar Ahmed

Roll No: 17252720-004
Department: MBA
Date: 2/12/2018
Submitted to: Sir Ramzan Maher
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Impact of interest rate on stock market of Pakistan

Introduction

Background of the study

This study present new approach to found the factor that impact of interest rate on stock
market of Pakistan. The interest rate variables affect the performance of the stock market.
Interest rate is inversely related to stock prices as well as exchange rate. A well-functioning and
a well-developed financial system play a key role in the economic progress of a nation. The
efficient and effective utilization of capital resources in the financial market is the imperative
job of a well-organized financial system. The stock market performance is one of the leading
dynamics which affects the economic progress of a nation and may have practical implications
for economic variables to accomplish the preferred outcomes.

The stock market development level, domestic currency value and the interest rate level give
details of the dynamics in the development level of an economy. As well, one of the changes
such as the structural changes in the equity market has been noteworthy. There are various
research works which have examined the consequences of movements in economic factors on
the equity market performance. Among a list of such factors, the most widely debated
economic factors are the policy rates and currency rates which put forward a considerable
influence on major indicators of the stock market performance.

The finance theory suggests that there is an association among these series, both in the short-
run plus long-run. Such as, if the state bank increases the bank rate from its previous level, this
policy step would clue investors to find the money market for their investments, if other
variables do not change. Conversely, if the interest rate decreases by the central bank from its
prior level, this change would be a signal for investors to mobilize their funds into the stock
markets giving a better reward.

In this research work, we are going to test the short plus long term connection of the interest
rate and exchange rate on the equity market performance. The KSE-100 indicator consists of
top hundred listed firms selected from different sectors in terms of highest market
capitalization. There are many indicators which are used for measuring the stock market
performance of Pakistan, but the most accepted indicators is the stock market capitalization
which is widely used by many studies like Kanasro et al, Sichoongwe , etc. The KSE-100 index
captures about 90% of the market capitalization of listed companies.

Exchange rate and stock market also has a relationship. Foreign investors convert their returns
on stocks in to their own currency. Foreign investors get affected when local currency gets
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stronger and converted into weaker currency. Exchange rate has negative relationship with
stock prices. Stock prices decreases when exchange rate increases and decrease in exchange
rate has positive impact on stock market.

In line of the above discussion interest rate and exchange rate and inflation has relationship
with stock prices. This study will be conducted to test this relationship empirically. For this
purpose a case of Karachi stock exchange will be selected because Karachi stock exchange is the
biggest stock exchange market in Pakistan.

Problem statement
The problem which is focused by researchers in this particular study to know about the impact
of interest rate on stock market of Pakistan. Stock markets are responsive to many political
interference ,economic situations and varying phases of international relations. In
addition, these days, the financial markets are getting better capital movements, financial
reforms and progressing in technology. Similarly KSE had been responsive to the internal
and external shocks over the years and has shown bearish and bullish movement over the
years. There is a need to study the reasons behind the movement and analyze the trends in the
stock market empirically.

interest rates plus exchange rate are reviewed to be the major variables which can apply a
momentous effect on the equity market performance. A change in policy rate is an essential
economic and financial feature influencing the value of stock market return.

some studies are available on the same concern, but mostly they have investigated the
interactions between exchange rate and the KSE-100 index. And there is no study found who
tried to examine the relationships between the said determinants and market capitalization.

Objective of the study

To determining the effect of interest rate on stock market in Pakistan.

To find out the impact of exchange rate on stock market of Pakistan.

The objective of the study is to investigate impact of inflation on stock returns of KSE 100.

To calculate relationship between interest rate , exchange rate and inflation on stock market of
Pakistan.

To analysis the impact of investor behavior on factors causing stock market of Pakistan.
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Literature Review

(Alam & Muzafar, 2014) Studied about the impact of interest rate on stock market in Pakistan.
Researcher investigate the problem in their research study that impact on the interest rate on
stock market in Pakistan. They were used money supply, interest rate (discount rate), inflation
rate, exchange rate, gold prices, industrial production (GDP) as independent variable and stock
market returns (KSE-100 index) as dependent variable over the period of 1993-2012 is
collected. Regression analysis , augmented Dickey Fuller (ADF). Unit root test and Johansen co
integration models are used to test the movement of macroeconomic factors affecting on stock
market. The empirical outcome shows that money supply, rate of inflation, gold prices,
industrial production have positive association with stock market return while interest rate and
exchange rate correlate negatively with stock market. Finding reveals that money supply is the
largest positive determinant of the stock market return while interest rate is largest negative
determinant of movement in Karachi stock market. The paper investigates the analysis on
movement of the Karachi stock market for the period 1993 to 2012. This research was done
through relevant theoretical and empirical literature review. This suggests that increase in
money supply leads to boost economy through increased cash flows and stock market prices go
up. Interest rates largest negative determinant of volatility in Karachi stock market.

(Hussain, Zaman, & Baloch, 2014) Researcher investigate the problem in their research study
that effect of interest rate on stock market in Pakistan. This study is focusing on the relationship
between stock returns of the Karachi Stock Exchange (KSE) and the short term interest rates in
Pakistan. The stock returns are calculated from Karachi Stock Exchange 100 index, and monthly
rates of six monthly T bills for the period of 1994 to 2014 are used for short term interest rates.
Co integration analysis will be applied to estimate the long term relationship between the two
variables of this research study. we find out the significant short term and long term
relationships between stock returns and the interest rates through the error correction
mechanism and co-integration test. Then Granger Casualty test is used to test that either the
stock prices cause the interest rates or the interest rates cause the stock returns. Thus we find
no significant relation between these two variables in either direction. So interest rate is not a
Granger cause of stock returns and stock returns are also not a Granger cause of interest rates
in Pakistan.

Hypothesis of the study

H1: Interest rate does have positive and significant effect on stock market of Pakistan.

H2: Exchange rate does have positive and significant impact on stock market of Pakistan.

H3: Inflation rate does have positive and significant effect on stock market of Pakistan.

H4: Relationship between interest rate , exchange rate and inflation does have positive and
significant impact on stock market in Pakistan.
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H5: Investor behavior does have positive and significant effect on stock market in Pakistan.

Research methodology

The data about relevant variables has been obtained from “Global economy, KSE, State Bank of
Pakistan, and other resources.” ” I will investigate stock market of Pakistan and will gather the
statistics ranging over a period of ten years preliminary from 2005 to 2013 monthly data.
Applicable variables are: Interest Rate, Stock Market Index and Stock Market Data collected
from various resources for our research. Information is obtained by the help of articles,
journals, books, official websites, KSE, LSE, ISE, International Monetary Fund, Global Economy,
colleagues, professors etc.
Model

Regression , correlation, descriptive analysis of data has been made for this research article.

Data Analysis and Interpretation

Regression statistics

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.213023553
R Square 0.045379034
Adjusted R Square 0.036287406
Standard Error 4088.520284
Observations 107

Interpretation
Multiple R value shows that a positive relationship between dependent and
independent variables.

R Square value shows that 0.04% variation changes in dependent variables due to independent
variables.
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ANOVA TABLE

ANOVA
Significance
df SS MS F F
Regression 1 83434543.01 83434543.01 4.9912989 0.027594562
Residual 105 1755179802 16715998.12
Total 106 1838614345

Interpretation
Value F 0.027594562 shows the significance relationship between dependent and
independent variables. The value of Significance f is less than 0.05 so we can say that relation is
significance, because anything less than 0.05 is called a significance.

Coefficients Standard Error t Stat P-value

Intercept 17062.65039 2217.881863 7.693218776 8.17121E-12
KIBOR -448.9245871 200.9400948 -2.234121505 0.027594562

Interpretation
P value is less than 0.05 that shows a significance relationship between interest rate
and stock market index. The higher interest rate can harm the economy of any country.

Correlation statistics

KSE-100 KIBOR
KSE-100 1
KIBOR -0.21302 1
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Interpretation
The data analysis of correlation shows that there is an exact positive relationship between KSE-
100( dependent variables) and KIBOR(independent variables).if the KIBOR is increase by 1%
than the KSE-100 decrease by -0.21302.

Descriptive statistics

KSE-100 KIBOR

Mean 12186.95 Mean 10.86084

Standard Error 402.6248 Standard Error 0.191053
Median 11456.12 Median 10.41
Mode #N/A Mode 9.54
Standard
Deviation 4164.783 Standard Deviation 1.976272
Sample Variance 17345418 Sample Variance 3.905649
Kurtosis 1.461237 Kurtosis -0.56116
Skewness 1.2086 Skewness -0.12575
Range 19928.75 Range 9.16
Minimum 5390.83 Minimum 5.91
Maximum 25319.58 Maximum 15.07
Sum 1304004 Sum 1162.11
Count 107 Count 107

Interpretation
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The value of mean is 12186.95 with the KSE-100 maximum value is 25319.58. the value of
mean is 10.86084 with the KIBOR maximum value is 15.07.Mean shows the average value of
the data. Median shows the mid values of the data.

Standard deviation shows the highest value of the data.

Minimum shows the minimum values of the data.

Maximum shows the maximum values of the data.

Significance of the study

The study focuses on the factor effecting stock market in Pakistan and its impact on stock
companies in Pakistan. Performance of the stock market is very important to investors and they
react to macroeconomic variables which may affect the performance of the stock market.
Interest rate, exchange rate and inflation are the key macroeconomic variables which affect the
market. This study will help the investors by providing empirical evidence of interest rate,
exchange rate and inflation effect on stock market which will help in their decision-making.

Conclusion
From the previous studies and my findings now it is easy to say that interest rate has a negative
impact on stock market, higher the interest rate lower the efficiency of stock market, it is
because if investors are getting higher without taking any risk then why should they invest in
stock market, so for a better economy the ruling state should lower its interest rate so that
economy of that country gets developed. It is not the only factor that has negative impact on
stock market there can be many other factors for example inflation rate etc which are having
negative impact on stock market.

References

Alam, S., & Muzafar, D. (2014). Impact of Interest Rate in Stock Market. European Scientific
Journal , 10 (19), 1857-7881.

Hussain, A., Zaman, G., & Baloch, Q. B. (2014). The Casual Relationship of Interest Rate on Stock
Market. City University Research Journal , 4 (2), 147-155.
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