Macroeconomic variables and Stock Market liquidity: The case of Pakistan Stock Exchange

Abstract

Stock markets are significant channel for escalating economic growth and a flourishing financial sector of a country. Numerous research studies have been investigated on the causal relationship between macro-economic indicators and stock market Liquidity. But with reference in Pakistan, only few studies can be traced in literature. The aim of this research study is to scrutinize the causal relationship between macro-economic indicators and stock market liquidity in Pakistan. The 26 years’ Time series data from 1990 to 2016 have been used to investigate the relationship between various macro-economic indicators and stock market liquidity in Pakistan. The, exchange rate, inflation, Interest rate and industrial production growth rate represent Macro-economic indicators whereas the stock market liquidity have been signified by the Stock Market turnover of the Pakistan Stock Exchange. The result has been found through E-view 9 statistical software. There are statistical techniques; Augmented Dickey Fuller test, Johansen’s co-integration and Granger’s causality test employed to check either the data is stationary or non-stationary and to find relationship between these macro-economic variables on Stock Market liquidity position in Pakistan. This study concluded that only industrial production growth rate and Interest Rate have co-integration with stock liquidity at 5% level of significance. However, exchange rate and inflation rate are shown no co-integrated with stock market liquidity in Pakistan. Hence, the two macroeconomic indicators namely IPGR and INT have a long run association with Stock market liquidity in Pakistan While, the other macroeconomic indicators INF and EX have no long run association with Stock liquidity.