Responsiveness of Stock Market Performance to Macro Economic Environment and South Asian Stock Markets: Evidence from Pakistan Stock Exchange

Abstract

This research investigated the impact of macroeconomic factors and South Asian stock markets on the performance of Pakistan's stock market, specifically using the KSE-100 Index. The study analyzed how fluctuations in exchange rates (USD/PKR, CNY/PKR, EUR/PKR), foreign direct investment (FDI), balance of trade (BOT), and regional stock market indices (Nifty 50, DSEX, NEPSE, and MASIX) influenced the performance of Pakistan’s stock market. Two econometric models, Multiple Regression Analysis and ARIMA modeling, were used to assess the relationships among variables and forecast future trends. The findings indicate that exchange rate fluctuations have a significant impact on KSE-100 performance. Foreign direct investment (FDI) was also identified to be in a positive relation with stock market performance. Balance of Trade (BOT) was also seen as yet another determinant of the performance of stock markets. Evidence shows that a trade surplus (surplus exports - imports) positively affects the return to stock markets by signaling economic prosperity and reinforcing investors' confidence. The study also concluded that the Pakistani stock market is heavily affected by regional stock markets, specifically the Indian, Bangladeshi, Nepalese, and Maldivian stock markets. Of them, Nifty 50 of India was most correlated with the KSE-100 Index, which indicates economic movements and investor sentiments in India heavily impact the Pakistani stock market. DSEX (Bangladesh), NEPSE (Nepal), and MASIX (Maldives) did also show a positive correlation with the KSE-100 Index but to smaller magnitudes than Nifty 50.