Impact of Exchange Rates on Stock Market: Evidence from Pakistan

Today in the present universe foreign currency is a cardinal constituent or tool for different sorts of concerns, and many states in the universe did concerns in foreign currencies like in Dollars, Euros etc. on the other manus motion in the stock market index is a cardinal index for the fiscal public presentation of a state. Stock market may hold bullish or carrier tendency which reflect its comparative strength in specific period. It besides shows the investor assurance and sentiments toward markets.

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The constitution of the relationship among the stock market and foreign exchange rates is of import for some grounds. Initially, it can impact determinations about pecuniary policy and revenue enhancement. Gavin ( 1989 ) analyze that fiscal market has a big impact on the aggregative demand. The policy shaper should be cognizant about the relationship sing stock market and demand. Second, the relation between the aggregative demand and stock markets may be used to calculate the way of the exchange rate. It will be utile for transnational houses to actively pull off their exposure associated to foreign contracts and exchange rate. Third, currency is treated as a trade good or an plus in portfolio of investing financess. So the consciousness about the relationship among currency and other assets in the portfolio of investing financess is of import.

This is non the first survey to look at the exchange rate and equity markets in the universe every bit good as in Pakistan. Like Aquino analyzed the foreign exchange exposure visage by Filipino companies around the Asiatic fiscal crisis. It was concluded that stock returns were non statistically significantly affected by the instability in foreign exchange. But after the crises, there was a important impact of the fluctuations in exchange rate on the stock returns ( Aquino 2005, 2006 ) .

Yau and Nieh investigated the relationship between Taiwan dollar/Japanese hankerings and the stock monetary values for the period from 1991 to 2005. They found that among the exchange rate and the stock monetary values of both states there was no long-run relationship. But this linkage exists merely to shorten the period ( Yau and Nieh 2006 ) .

But the present survey is exceeding in the sense that it uses the most recent informations of the exchange rate and stock market which may supply latest linkage to the investors and other policy shapers in Pakistan.

There are three stock exchanges known as Karachi Stock Exchange ( KSE ) , Lahore Stock Exchange ( LSE ) and Islamabad Stock Exchange ( ISE ) presently runing in Pakistan. Among these Karachi Stock Exchange ( KSE ) is considered as major and the well known stock market of Pakistan. It is regarded as a representative of all three stock exchanges of Pakistan. Karachi Stock Exchange ( KSE ) formed on September 18, 1947. It began its operation with five companies that have paid a capital of Rs.37 1000000s of dollars. The first index was the 50 index of trade and was done through open-out-cry system. But now KSE has 662 listed companies and considers a chief economic and concern hub of Pakistan. The day-to-day KSE-100 Index published by the Karachi stock exchange is announced at 3:10 autopsy. Therefore KSE-100 index can be used as public presentation indexs of the stock market in Pakistan. KSE played an of import function in the economic system of Pakistan in different jobs like political, societal, fiscal and other issues ( Karachi Stock Exchange, 2011 ) .

To place the linkage of foreign exchange rate with equity market is important because of above grounds. So in this survey the research worker tries to place this relationship by utilizing assorted statistical techniques.

Rationale of the survey

The currencyA market may be linked withA equity marketA in many different ways. It can be seen that if there is an upward tendency in the stock market, so there will be a big inflow of foreign capital in the state due to international investors. This inflow of foreign money would be a cardinal indicatorA for the improvement of economic place of any state. The antagonist besides sustains that if there is a long downtrend visible on the stock market, foreign investors, the most likely haste to sell their portions that would hold a significant impact on the stock market of a state. This logical thinking can be applied to all currencies and stock markets in the whole universe ( Kathy Lien, 2009 ) .

The basic thought behind this survey is to supply a hint to the stock agents, directors, contrivers, policy shapers and regulative governments that they actively portion information about the alteration in macroeconomic variables. AND besides supply considerable information necessity for them, which may be used for future determinations about stocks and stock markets of Pakistan particularly about KSE observing the motion of the exchange rate in Pakistan. This probe is besides utile for executives, directors, responsible for the determinations, research workers and pupils who are non familiar with the exchange rate and securities markets in Pakistan.

Problem designation

Due to globalisation and technological inventions any one can entree the foreign markets. The concern in foreign states needed to integral with alteration in exchange rate kineticss. Since, the exchange rate can be defined as the monetary value of currency of one state expressed in the currency of another state. So the alteration in the exchange rate might hold some impact on the macroeconomic variables of any state. The stock market of Pakistan may be influenced due to alter in exchange rate. So to place this impact of exchange rate on the stock market is a affair which requires purposes.

Problem Statement

The chief focal point of this survey is to cognize that, how exchange rate affects the equity market of Pakistan? It further explores the way ( positive or negative ) and strength of relationship among exchange rate and stock market in Pakistan. For this intent research worker links the exchange rate with equity market of Pakistan to see a clear image approximately them as they influence several other variables.

Research Question

What is the possible impact of exchange rate fluctuation on the equity market of Pakistan?


This survey aims to analyze the consequence of exchange rate on the Karachi stock exchange. The aims of the survey are:

.To analyzes the impact of exchange rate fluctuation on equity market of Pakistan.

.To determines whether the impact is statistically important or non.


Resources include fiscal informations of KSE, articles, books, newspaper and cyberspace. The information will be collected from yokel finance and the web site of Karachi Stock Exchange.

Scope of the research

It is believe that the fiscal place of an economic system is vulnerable to the foreign exchange rate. So it is really important to research the linkage between the exchange rate and equity market. The present survey is an attempt to look into this of import facet and it tries to analyse the impact of exchange rate on the equity market of Pakistan.


In the undermentioned subdivision, there are some surveies associated to this country of survey that has been investigated earlier by other research workers.

Hussain et Al. examined the Impact of Macroeconomics Variables on Stock market by utilizing the periodical information of some macroeconomic variables such as foreign exchange rate, wide money M2, whole sale monetary value ( WSP ) index, industrial production index ( IPI ) , gross fixed capital formation and foreign exchange modesty. The period of clip to analyze was started from 1986 to 2008. The consequence showed that, after the reform in 1991, the force per unit area of the exchange rates and militias effects significantly to the equity market, while the variables as IIP, and GFCF had no important consequence on the stock monetary values. In add-on, concluded that internal factors of the companies such as increasing the production and capital formation had no important consequence while external factors such as the exchange rate and militias significantly affected the stock monetary values. ( Hussain et al. 2009 ) .

Nishat and Shaheen analyzed long-run relationships among set of macroeconomic variables and the equity market of Paksitan. The macroeconomic variables that were used in their survey includes: industrial production index ( IPI ) , the consumer monetary value index ( CPI ) , M1 and the value of an investing gaining the money market rate. Vector mistake rectification theoretical account was used to look into the relationship from 1973 to 2004. It can be revealed that there is a cardinal connexion between the equity market and the economic system and showed that industrialised creative activity was the major positive determiner of Pakistani stock monetary values. On the other manus, rising prices was the major negative determiner of equity monetary values in Pakistan. It was established that the macroeconomic variable farmer caused stock motions in monetary values, the contrary causality was observed in the variable in industrial production and the stock monetary values. In add-on, argued that statistically important continuances between fluctuations in the bag and alterations in the existent economic system were comparatively short. Additionally, it was further argued that statistically important lag lengths between fluctuations in the stock market and alterations in the existent economic system were comparatively short ( Nishat & A ; Shaheen, 2004 ) .

Bhattacharya et Al. analyzed a instance survey to research the linkage between stock market and macroeconomic variables such as Exchange Rate, Foreign Exchange Reserves and Value of Trade Balance. They used method of non-causation that was considered by Toda and Yamamoto ( 1995 ) for the period from 1990 to 2001. Proxy used in the probe of stock market was Indian, the Bombay sensitive Index ( BSI ) . The three major macroeconomic variables incorporated in the probe was effectual exchange rate, the foreign exchange militias and the balance of trade. The survey revealed the attractive resulted in the construction of the stock market Indian, chiefly as respects the exchange rate, the foreign exchange militias and the balance of trade. It is suggested that there is no relation between cost and equity the three macroeconomic variables studied ( Bhattacharya & A ; Mukherjee, 2001 ) .

Dimitrova examined the association between stock monetary values and the exchange rates utilizing multivariate theoretical account. He focused on the stock markets in America ( USA ) and the United Kingdom ( UK ) during the period 1990-2004. The consequence of the survey shows that there was a relationship between the exchange rate and the stock market. The tester stressed that there was a positive correlativity when the monetary value of actions were the chief variable and be expected negative when exchange rates were the chief variable. ( Dimitrova, 2005 ) .

Sohail et Al. conducted a survey on Lahore stock exchange ( LSE ) , the aim of that survey was to detect the long-run, every bit good as the short-run associations between Lahore Stock Exchange ( LSE ) and some of import variables. Using the monthly informations for the variables from 2002 to 2008, it was found that there was a negative impact of the consumer monetary value index ( CPI ) on the stock market returns in Pakistan while industrial production index ( IPI ) , existent effectual exchange rate, the money supply had an of import positive long-run consequence on stock returns to Pakistan ( Sohail & A ; Hussain, 2009 ) .

Robert Gay investigated clip series relationship between stock exchange index and some of the macroeconomic variables of the monetary value of oil and the type of alteration in China, India, Russia and Brazil, utilizing the Box-Jenkins auto-regressive incorporate traveling norm ( ARIMA ) theoretical account. It came to the decision of his survey in which there was no important association between exchange rate and the monetary value of oil on the index of the stock market of these states. Furthermore, there was no important relationship between yesteryear and present outputs of the stock markets in these states ( Gay, 2008 ) .



Since there are 660 listed companies in Karachi stock exchange of Pakistan on November 7, 2010. This research uses KSE-100 Index as a benchmark to happen out the impact of exchange rate fluctuation on equity market of Pakistan.

Instrument and Measures

This research will be based on secondary beginnings, therefore no questionnaire will be distributed. The survey uses the fiscal information of last 6 old ages of Karachi stock exchange ( one of the major stock exchange in Pakistan ) and exchange rate. This survey will look into the impact of foreign exchange rate on equity market in Pakistan.

This survey uses KSE-100 index as a placeholder of equity market of Pakistan and uses exchange rate between dollar and rupees to analyse the impact of exchange rate fluctuation on equity markets of Pakistan. So, this research treats KSE-100 index as the dependent variable and exchange rate as independent variables.


The undermentioned statistical tools will be used to analyze the impact of exchange rate fluctuation on equity market of Pakistan.

Descriptive statistics

Correlation matrix

Arrested development analysis

Descriptive statistics illustrate the chief characteristics of a aggregation of informations quantitatively. It may include mean, average, manner, standard divergence, upper limit and lower limit. Correlation theoretical account will be tested to detect the linkage between the exchange rate and equity market of Pakistan. It will besides edify about the way and strength of relationship between the variables. Further to happen out the impact of exchange rate on stock market of Pakistan, the survey will execute the arrested development analysis.

The information of Karachi stock exchange will be compared with the informations of exchange rate of Pakistan. Statistical tools including timeline graphs and others will be constructed and made usage of to find the several effects and a comparing between exchange rate and equity market.

Research documents of assorted writers related to the survey will be studied and justice against with the consequences of this peculiar research.


Bhattacharya, B. , & A ; Mukherjee, J. ( 2001 ) . Causal Relationship Between Stock Market And Exchange Rate, Foreign Exchange Reserves and Value Of Trade Balance: A Case Study For India.

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Cruz, M. , & A ; Walters, B. ( June 2008 ) . Is the Accumulation of International Reserves good for Development.A Cambridge Journal of Economics.

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Dimitrova, D. ( August 2005 ) . The Relationship between Exchange Rates and Stock Prices – Studied in Multivariate Model.Issues in Political EconomyA , 14. Web site: hypertext transfer protocol: //

Elizabeth. ( 2006 ) .A the Oxford lexicon of Phrase and Fable.A Retrieved February 10, 2010, from Encyclopedia. web site: hypertext transfer protocol: //

Encyclopedia. ( 2009 ) .A The Oxford Pocket Dictionary of Current English. Retrieved February 14, 2010, from Encyclopedia.

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Gay, R. D. ( March 2008 ) . Consequence of Macroeconomic Variables on Stock Market Returns for Four Emerging Economies – Brazil, Russia, India and China.A International Business & A ; Economics Research JornalA , 7.

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Gulf News. ( 2008 ) .A Investment. Retrieved March 15, 2010, from gulfnews.

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Hussain, D. I. ( 2009 ) . Why does Pakistan hold to roll up foreign militias?

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Karachi Stock Exchange. ( 2010 ) .A debut. Retrieved February 2010, from Karachi Stock Exchange web site: hypertext transfer protocol: //

Ministry of Finance Islamabad, Govt of Pakistan. ( n.d. ) . Capital Markets.A Economic Survey of PakistanA . Islamabad, Pakistan: Govt of Pakistan.

Mohammad, S. D. , Hussain, A. , & A ; Ali, A. ( 2009 ) . Impact of Macroeconomics Variables on Stock Prices – Emperical Evidance in Case of KSE.A European Journal of Scientific ResearchA , 38 no. 1, 96-103.

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Nishat, D. M. , & A ; Shaheen, R. ( 2004 ) . Macro-Economic Factors and Pakistani Equity Market.

State Bank of Pakistan. ( 2010, January ) . Foreign Reserves. Lahore, Pakistan: State Bank of Pakistan.


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