Changes in interest rate may influence investors investment decision i.e. whether to invest or to save at bank.Exchange rate changes influence imports and exports level.
Effect of interest rate and exchange rate on
The impact of Interest rate andExchange rate on Stock Prices. APakistani 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 TitleStock Prices and Exchange Rates: Are they Related? (Rasheed & Naeem, 2002)Evidence from South Asian Countries.Exchange rate and stock price interactions in (Abdalla & Murinde, 1997)emerging financial markets: evidence on India,Korea, Pakistan and the Philippines.Dynamic relationship between stock prices and (Nieha & Leeb, 2001)exchange rates for G-7 countries.Linkage between Stock Market Prices and Exchange (Farooq & Keung, 2002)Rate: A Causality Analysis for Pakistan.Dollar exchange rate and stock price: evidence (Kim, 2003)from multivariate cointegration and errorcorrection model.
The determinants of the variability of (Grossman & Shiller, 2001)stock market prices.The Exchange-Rate Exposure of U.S. (Jorion, 1990)Multinationals.A bivariate causality between stock (Granger, Huang, & Yang, 2000)prices and exchange rates: evidencefrom recent Asian fluEstimating the effects of Interest Rates (Çifter & Ozun, 2002)on Share Prices Using Multi-scaleCausality Test in Emerging Markets:Evidence from Turkey
The Relationship between Exchange (Kurihara, 2006)Rate and Stock Prices during theQuantitative Easing Policy in JapanAnalysis of the relationship between (okpara & Odionye, 2012)exchange rate and stock prices :Evidence from NigeriaIs exchange rate volatility influenced (Kansas, 2002)by stock return volatility? Evidencefrom the US, the UK and JapanRelationship between Interest Rate (Alam & Uddin, 2009)and Stock Price: Empirical Evidencefrom Developed and DevelopingCountries
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 websitehttp://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 .