Role of Stock market in Economy

1.1 Overview:

Stock market plays an of import function in the economic system ; it has traditionally been viewed as an index or forecaster of the economic system. Many believe that big lessening in stock monetary values is brooding of future recession, whereas addition in the stock monetary values suggests the economic growing which means stock market presents itself as an index of economic activity.

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Another relationship focuses on the possible impact of stock market may hold on aggregative demand, peculiarly through aggregative ingestion and investing. The impact is that people with portions will see a autumn in their wealth. If the autumn is important it will impact their fiscal mentality. If they are losing money on portions they will be more hesitating to pass money ; this can lend to a autumn in consumer disbursement.

Changes in the stock market, may do of fluctuation in macroeconomic variables, e.g. Increase or diminish the ingestion outgo or Investing disbursement, Gross domestic Product ( GDP ) and the consequence of stock markets development on employment. Higher stock monetary values can excite ingestion disbursement by increasing the wealth of the consumers and higher stock monetary values can besides excite investing disbursement by enabling houses to raise their financess more efficaciously by publishing Initial Public offering ( IPO ) . Falling portion monetary values can halter house ‘s ability to raise finance on the stock market. Firms who are spread outing and wish to borrow frequently do so by publishing more portions ; it provides a low cost manner of borrowing more money. However, with falling portion monetary values it becomes much more hard.

The stock market itself can impact consumer assurance. Share monetary value motions are contemplations of what is go oning in the economic system. E.g. recent falls in stock monetary values of Karachi Stock Exchange ( KSE ) indicates a recession in our economic system. Bad headlines of falling portion monetary values are another factor which discourages people from disbursement. On its ain it may non hold much consequence, but combined with falling house monetary values, portion monetary values can be a discouraging factor.

Frequently people who buy portions are prepared to lose money ; their disbursement forms are normally independent of portion monetary values, particularly for short term losingss.

Many research workers include Pakistanis were focused to look into the relationship of stock with major economic variables like Gross Domestic Product ( GDP ) , Gross National Product ( GNP ) , Investments, unemployment and Inflation ( CPI ) in recent old ages. Our survey is typical in a manner that we use to prove stock with imports and exports of Goods and Services of Pakistan.

It is really of import to cognize about Karachi Stock Exchange ‘s ( KSE ) function as a prima index of Pakistan imports and exports. Because a big figure of experts here in Pakistan knock stock market due to its abnormality by rumours which destroy its function as a forecaster to economic system. A figure of times here in Pakistan it happens when economic figures shows upward tendency but the intelligence coming from stock market was atrocious particularly for little investors.

Stock market ‘s of Pakistan sometimes predict good about the hereafter of economic system, as we have seen in 2007, A the lessening in stock monetary values leads to a recession in economic system.

But in 2005, the clang in Karachi stock market did n’t able to hit economic variables, and generated “ False Signals ” about the economic system, so hence, how should we trust on stock market as forecaster / Indicator?

The chief ground to look into about stock ‘s function in economic system is that, fluctuations in stock markets do non needfully foretell the economic hereafter. Share monetary values can rise/fall without doing a downswing in the economic system.

1.2 Problem Statement:

Is the stock market dependable plenty to foretell approaching motions in economic system? And how stock market plays its important function in the context of Pakistan ‘s economic system?

1.3 Hypothesiss

H1. Stock market is a important forecaster of economic system because the motion in Stock Prices precedes fluctuations in Imports activities.

H2. Stock market is a important forecaster of economic system because the motion in Stock Prices precedes fluctuations in Exports activities.

1.4 Outline of the survey:

Although stock market is a prima index but this does non intend causality, since both the stock market and the economic system are influenced by other factors, but stock market reacts faster.

The intent of this research is to look into the dependability of stock market which presents itself as a taking forecaster of economic fluctuations worldwide. And to happen any relationship between these variables, if there is any relation so the grounds that why and how motions in stock monetary values precede fluctuations in economic activity.

Simple additive arrested development theoretical account is used to prove the hypotheses and to find the strength of relationship among these variables. Two theoretical accounts are formed for these three variables. The independent variable is monthly stock monetary values of Karachi Stock Exchange ( KSE ) , and monthly exports and imports of Goods and services of Pakistan is the dependent variable. Two new independent variables are added to better the consequences. These are Lag_1 Exports and Lag_1 Imports.

Chapter 2: LITRATURE REVIEW

Relationship between stock market and macro economic variables, focal point on the relationship of stock monetary values with ingestion outgo, investing disbursement and economic activity. The economic activity by and large step by Gross Domestic Product ( GDP ) and/or Index of Industrial production.

Relationship between stock monetary values and ingestion outgos which based on the life rhythm theory developed by Ando and Modigliani ( 1963 ) , states that persons base their ingestion determination on their expected life-time wealth. Part of their wealth may be held in the signifier of stocks associating stock monetary value alterations to alterations in ingestion outgo. Thus, an addition in stock monetary values will increase the expected wealth, which, in bend, will increase the ingestion expenditures, proposing the way of causality from stock monetary values to ingestion outgos. On the other manus, an addition in ingestion outgos may ensue in an addition in the corporate sector ‘s net incomes, which will ensue in higher stock monetary values, connoting causality from ingestion outgos to stock monetary values.

The relationship between stock monetary values and investing disbursement which based on the Q theory of Tobin ( 1969 ) , where Q is the ratio of entire market value of houses to the replacing cost of their existing capital stock at current monetary values. Harmonizing to the theory, the houses would increase their capital stocks if Q is greater than one, connoting that the market value of houses is expected to lift by more than the cost of extra physical capital. Thus an addition in stock monetary values will ensue in an addition in the market value of houses, connoting that houses would increase their capital stocks reflecting an addition in investing disbursement.

Another nexus, though less direct, between stock monetary values and investing disbursement is based on the neoclassical or cost-of-capital theoretical account. The theoretical account assumes that houses first determine the coveted stock of existent capital on the footing of monetary values of labour, capital, and expected gross revenues and so find the rate of investing depending on how fast they wish to make the coveted capital stock in the face of important accommodation cost. Therefore, the expected alterations in gross revenues and planned end product are the major factors impacting investings. However, as noted by Bosworth ( 1975 ) , if higher net incomes are implied by higher expected end product that increases stock monetary values, so the market rating model implicitly histories for the consequence of expected end product. Finally, the relationship between stock monetary values and economic activity is investigated to analyze whether the stock market leads or lags economic activity.

Furthermore, the relationship of stock monetary values with the constituents of aggregative demand, ingestion, and investing sometimes supply conflicting consequences, doing an ambiguity refering the way of causality between stock monetary value alterations and macro variables. As mentioned above, the economic activity is by and large measured by GDP and/or IIP.

Husain ( 2001 ) suggests that the stock market in Pakistan is non much developed to play its due function in act uponing aggregative demand. The lifecycle hypothesis and Tobin ‘s Q theory, which provide the footing of linkages between stock monetary values and ingestion and investing outgos severally, do non look to be valid in Pakistan.

Another of import but most distressing characteristic of the stock market in Pakistan is that it can non be characterized as the taking index of economic activity. A survey clearly indicates that it lags economic activity. It can be said that persons, establishments, and authorities should be cognizant of bad bubbles. In the absence of other strong economic indexs, hiting up of stock monetary values should be dealt with attention.

Regardless of Pakistani market, International economic systems besides do non hold that much influence by stock monetary values.

Atesoglu ( 2002 ) besides mentioned in that fluctuations in stock monetary values should non hold an appreciable impact on the economic system should non nevertheless govern out the possibility that favourable developments in stock monetary values can trip a pessimistic or an optimistic economic development and alter long-run outlooks. Lapp in the instance of Pakistan because our stock market is extremely bad market and ca n’t hold much impact on economic system.

Park ( 1997 ) defines the same consequence of macroeconomic variables on stock returns. Stock ‘s reaction to an economic variable reflects the variable ‘s effects on future corporate hard currency flows and rising prices. Stock returns were found to be related most negatively with employment growing and most positively with GDP.

Harmonizing to Christos ( 2004 ) ; there is no correlativity between the current value and the past values, and hence, the stock returns and rising prices are characterized as independent factors in Greece market. And therefore, his research besides finds grounds of no long-term relationship between the two variables. As discussed earlier stock market in Pakistan is non that much developed yet to plays its function in economic system, so it needs betterments to fit macro economic variables.

Jain ( 1988 ) discuss that there is a strong impact of economic news/Information on stock monetary values, which reflected in a reactively short period of 1 hr. The advantage to utilize hourly stock returns informations in research undertakings look intoing the effects of proclamations of economic variables. Same state of affairs we have seen many times in Pakistan, here stock market responds rapidly excessively because of economic proclamations e.g. Monetary policy. That carries involvement rates which straight relates to the stock markets and the major participants of market are besides acute to cognize about new developments in such macro economic variables.

Surveies made by Sara & A ; Levine ( 1996 ) look into about the function of fiscal system in economic growing. In this respect the research found that the preset constituent of stock market development is positively associated with economic growing. The transverse state growing arrested development involves a strong nexus between stock market development and economic growing.

Another survey made by Levine ( 1997 ) uses bing theory of goldworker ( 1969 ) which documented the relationship between fiscal and economic development. The research suggest through empirical analysis, including steadfast degree surveies, industry degree surveies, single state surveies, and wide cross state comparings, show a strong positive nexus between the operation of the fiscal system and long tally economic growing.

Both Sara & A ; Levine ( 1998 ) work together once more to look into upwind step of stock market liquidness, size, violability and integrating with universe capital markets are strongly correlated with current and future rates of economic growing, capital accretion, productiveness betterments and salvaging rates of 47 different states. The probe provides empirical grounds on the major theoretical arguments sing the linkages between stock markets and long tally economic growing. The research studied the empirical relationship between assorted steps of stock development, banking development and long rum economic growing. And happen that after commanding for many factors associated with growing, stock market liquidness and banking development are both positively and robustly correlated with at the same clip and future rate of economic growing, capital accretion and productiveness growing.

Research done by Borja & A ; Braun in ( 2005 ) finds the public presentation of companies during recessions. The paper shows that those companies which are more dependent on external funding hits harder during recessions specially when they are located in states with hapless fiscal contractibility, and when their assets are less protective of financer.

Luigi & A ; Rajan ( 1998 ) examines whether fiscal development facilitates economic growing by analyzing one principle for such a relationship that fiscal development reduces the costs of external finance to houses. Specifically, research find whether industrial sectors that are comparatively more in demand of external finance develop disproportionately faster in states with more- developed fiscal markets.

The research findings may bear on three different countries of current research. First, it suggest that fiscal development has a significant supportive influence on the rate of economic growing Second, in the context of the literature on fiscal restraints, the research provides fresh grounds that fiscal market imperfectnesss have an impact on investing and growing.

Finally, in the context of the trade literature, the findings suggest a possible account for the form of industry specialisation across states. The degree of fiscal development can besides be a factor in finding the size composing of an industry every bit good as its concentration.

Nagaishi ( 1999 ) happen out the reply of stock markets positive function in the procedure of economic growing in the context of Indian market. The probe consequences indicate that so far as the map of domestic nest eggs mobilisation is concerned, Indian stock market development signifier 1980s inwards has non played a outstanding function, secondly, if there is farther deregulating of the stock market to pull more foreign portfolio influxs into India, there seems to be no manner to avoid similar jobs as Mexico, Korea and Thailand such as more volatile motion of domestic stock monetary values. Lastly bank recognition to the commercial sector has no positive correlativity ship with indexs of stock market developments. These findings indicate that the functional relationship between stock market development and economic growing is at least so far a fond hope in the Indian context.

Ann & A ; Lyigun ( 2004 ) examines the relationship between income inequality and variableness in aggregative ingestion growing. In high income states, greater income inequality appears to be associated with more volatility in ingestion growing, whereas in lower income states, higher degrees of income inequality tend to be associated with less volatility. Research presents grounds that variableness in existent GDP growing is besides related to income inequality in the same manner. The consequences suggest that in low income states, higher degrees of inequality appear to be associated with less fluctuations in ingestion growing, and in high income states, more inequality seems to be associated with greater fluctuations. Some preliminary consequences indicate that fiscal development may assist to explicate the relationship between inequality and aggregative ingestion variableness.

Odedokun ( 1998 ) attempted to place whether fiscal intermediation affects economic growing, and besides for finding the channels by which any affects it may hold on growing. Study aims at enhance the earlier 1s and, particularly, at proposing a new model for measuring the function of fiscal intermediation and using the model to existent informations for developing states.

The findings suggests, Growth of fiscal sums in existent footings have positive impacts on economic growing of developing states. Fiscal sums in relation to overall economic activities or GDP, promotes economic growing in the low-income development states but has no perceptible consequence in the high-income development states. The combined effects of fiscal intermediation, which are outwardness and intersectional factor productiveness differential effects, on economic growing are significantly positive.

Liow, Ibrahim, & A ; Huang ( 2005 ) look into the relationship between the expected hazard premia on belongings stocks and some major macroeconomic hazard factors as reflected in the general concern and fiscal conditions in an international context.

Findingss suggest that expected hazard premia and the conditional volatilities of the hazard premia on belongings stocks are clip undependable and energetically linked to the conditional volatilities of the macroeconomic hazard factors. However there are some disparities in the significance, every bit good as way of impact in the macroeconomic hazard factors across the belongings stock markets.

CHAPER 3: Research METHODS

3.1 Method of Data Collection

Secondary informations is the chief beginning to roll up the information for this research. We collect this information from web sites of concerned variables. Besides include assorted visits to State bank and Karachi stock exchange for maximal cognition signifier experts to look into the relationship between these variables.

3.2 Sample Size

The sample period used in this survey covers 5-years period get downing at the start of 2005 and stoping at the stopping point of 2009. Quarterly informations of 5-years is used and therefore we have a size of 60 observations for each variable.

3.3 Research Model

Imports = I±+I? ( stock monetary values ) + I­

Exports = I±+I? ( stock monetary values ) + I­

3.4 Statistical technique

Arrested development analysis ( Simple Liner Regression ) is used to look into the information. Because arrested development analysis includes any techniques for patterning and analysing several variables, when the focal point is on the relationship between a dependent variable and one or more independent variables or the arrested development theoretical account assumes that there is a additive, or “ consecutive line, ” relationship between the dependant variable and each forecaster.

Chapter 4: Consequence

4.1 Findingss and Interpretation of the consequences

4.1.1 Model Summary Imports

Model Summary

Model

Roentgen

R Square

Adjusted R Square

Std. Mistake of the Estimate

Durbin-Watson

1

.803a

.645

.632

378.23201

2.466

a. Forecasters: ( Constant ) , lag elf, stock

B. Dependent Variable: imports

After making one more independent variable the theoretical account improves and Durbin Watson value reaches 2.466 which mean that there is a positive correlativity between imports and stock. R square is now explicating 64.5 to stock.

ANOVAb

Model

Sum of Squares

Df

Mean Square

F

Sig.

1

Arrested development

1.454E+07

2

7.272E+06

50.833

.000a

Residual

8.011E+06

56

143059.454

A

A

Entire

2.256E+07

58

A

A

A

a. Forecasters: ( Constant ) , lag elf, stock

B. Dependent Variable: imports

ANOVA tabular array shows that important value is less than 0.05 mean which means theoretical account is perfect and arrested development is required.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

T

Sig.

Collinearity Statisticss

Bacillus

Std. Mistake

Beta

Tolerance

VIF

1

( Constant )

530.081

262.050

A

2.023

.048

A

A

Stock

.053

.022

.220

2.448

.018

.785

1.273

lag_imp

.660

.088

.677

7.534

.000

.785

1.273

a. Dependent Variable: imports

Coefficient tabular array shows that important value of stock is less than 0.05, which means stock has a important impact on import.

4.1.2 Model Summary Exports

Model Summaryb

Model

Roentgen

R Square

Adjusted R Square

Std. Mistake of the Estimate

Durbin-Watson

1

.512a

.262

.236

236.47400

2.224

a. Forecasters: ( Constant ) , LAG_EXPO, stock

B. Dependent Variable: export

Making one more independent variable the theoretical account improves and Durbin Watson value reaches 2.224 which mean that there is a positive correlativity between Exports and Stock Prices. R square is now improves and it shows Exports are now explicating 26.2 to Stock Prices.

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Arrested development

1111975.169

2

555987.584

9.943

.000a

Residual

3131517.339

56

55919.952

Entire

4243492.508

58

a. Forecasters: ( Constant ) , LAG_EXPO, stock

B. Dependent Variable: export

ANOVA tabular array show that important value is less than 0.05 mean which means this theoretical account is besides perfect and arrested development is required.

Model

Unstandardized Coefficients

Standardized Coefficients

Bacillus

Std. Mistake

Beta

T

Sig.

1

( Constant )

878.708

217.665

4.037

.000

Stock

.026

.012

.244

2.050

.045

LAG_EXPO

.381

.116

.391

3.294

.002

a. Dependent Variable: export

Coefficient tabular array shows that important value of Stock Prices is less than 0.05, which means Stock Prices has a important impact on Exports.

4.2 Hypothesis Assessment Summary

Hypothesis

Independent Variables

T value

sig.

Remarks

H1. Stock market is a important forecaster of economic system because the motion in Stock Prices precedes fluctuations in Imports activities.

Stock Monetary values

2.023

0.48

Accepted – there is important positive relationship between Stock Prices and Imports of Goods and Services of Pakistan.

Dependent Variable: Imports of Goods and Services of Pakistan

Hypothesis

Independent Variables

T value

sig.

Remarks

H2. Stock market is a important forecaster of economic system because the motion in Stock Prices precedes fluctuations in Exports activities.

Fertilizer

4.073

0.000

Accepted – there is important positive relationship between Stock Prices and Exports of Goods and Services of Pakistan.

Dependent Variable: Imports of Goods and Services of Pakistan

DISCUSSIONS, IMPLICATIONS, FUTURE RESEARCH AND CONCLUSIONS

5.1 DISCUSSIONS

The consequence of fluctuation of stock monetary values motion have been found impressive with respective of imports of Pakistan. As we have seen statically consequences have shown that there is strong positive correlativity between these variables. And imports of goods and services of Pakistan are explicating 64.5 % to stock monetary values. That means there is an tremendous impact of fluctuation of stock monetary values on imports of goods and services of Pakistan. On the other manus exports of goods and services of Pakistan are besides demoing positive correlativity with stock monetary values but it merely explicating 26.2 % to stock monetary values which is really much low as it was expected.

But it is besides to observe down that consequences of both imports and exports seems really much existent in the context of Pakistan in the sense that Imports are higher than exports and consequences shown strong relation with stocks. Whereas exports of Pakistan are ever lesser than imports and the informations shown same behaviour with it that recommends weaker relationship between exports but still our hypothesis is accepted in the instance of Exports as good.

5.2 IMPLICATIONS AND FUTURE RESEARCH

We try to research the market which is really unpredictable and stock markets of Pakistan are criticized due to its unsure behaviour. This paper provides chance to those research workers who want to look into the relationship or you can state mutuality between stock market and economic variables particularly in the context of Pakistan. Although exports of Pakistan are lesser than imports but still this paper provides opportunity for future research worker because Pakistan ‘s exports may increase than imports and balance of payment displacements towards positive and hence that research will be more interesting. This paper besides helps to those scholars who are acute to cognize about stock engagement or its impact in the motion of economic variables.

5.3 Decision

In reasoning comments we can surly state that our hypothesis is accepted through the consequences which are derived statically in the instance of imports and although exports are explicating lesser to stock to stock monetary values but still we found strong positive correlativity between these two variables. And that indicates our hypothesis is accepted.

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