Abstract
The purpose of the research is to examine the causal relationship between stock prices and the variables representing the real sector of the economy for example real GDP, and real investment, in Pakistan. In this study, annual data is used (quarter-wise) from December 1980 to June 2007 and the correlation analysis has been applied, to investigate the relationship. For better understanding of the Market’s Behavior, data has been grouped in to Liberalization periods; Preliberalization and Post-Liberalization. The stock market in Pakistan provides an average quarterly return of 2.86%.The average annual growths in real variables are just lower than 1% for GDP and returns slightly over 1% in investments. A comparison of the descriptive statistics between the two sub-periods indicates decline in the average growth in real variables. Real GDP fell ,and real investment also decreased. The decline is significant both in GDP and investment. Though the magnitude of the average growth in stock price index increased in the second period it is not significantly different from that of the first period. The descriptive statistics indicates a much higher expansion in stock prices relative to real variables. However, the stock prices also experienced higher volatility during the sample period whereas the real variables seem to be stable
Highlights
1.1 Background of the StudyThe stock market plays an important role in the economy by mobilizing domestic resources and channeling them to productive investment
The purpose of the research is to examine the causal relationship between stock prices and the variables representing the real sector of the economy like real Gross Domestic Product (GDP) and investment spending in Pakistan
Though the magnitude of the average growth in stock price index increased in the second period it is not significantly different from that of the first period
Summary
The stock market plays an important role in the economy by mobilizing domestic resources and channeling them to productive investment. The knowledge of the relationship between stock prices and macro variables is becoming more important in the case of developing countries in view of the various economic reforms taking place there, starting, in the beginning of the 1990s there have been a number of measures taken for economic liberalization, privatization, relaxation of foreign exchange controls, and in particular the opening of the stock markets to international investors. These measures resulted in significant improvements in the size and depth of stock markets in developing nations and they are beginning to play their due role. The measures taken for economic liberalization, privatization, relaxation of foreign exchange controls, and in particular the opening of the stock markets to international investors were supposed to greatly impact the economy including the real sector. (Fazal Husain, 2006)
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