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It is a long debated issue of interest rate sensitivity to stock market prices. The impact of interest rate fluctuations on the stock prices has received a great deal of attention in the literature. Interest rate changes are broadly recognized as a major source of uncertainty for investors. Extensive research has been done in the past to examine and analyze the economic significance of interest rate changes and its effect on stock market prices.
The results of these empirical research papers have played significant role in establishing meaningful conclusions about relationship between interest rate sensitivity and stock market prices all around the world, as the research conducted has been for many different countries around the globe to make the results more reliable.
This research paper examines the causal relationship between interest rate sensitivity on stock market prices in case of Pakistan. The dependent variable in this study is the KSE-100 Index and the independent variables are M2 growth, CPI (Consumer Price Index), Call rate (short term interest rate), and DSC (Defense Saving Certificate rate). The data has been gathered from the year 1992 to 2012 and the source of data compilation is the World Bank and State Bank of Pakistan.