Macroeconomic Variables and Stock Market Performance in Pakistan: Evidence from PSX (1995–2025)

Abstract

The macroeconomic determinants of stock market returns have been one of the most controversial topics in financial economics, especially in developing markets where financial markets are very sensitive to policy uncertainty and economic instability.  The aim of this study is to examine the effect of some of the macroeconomic determinants on the performance of the Pakistan Stock Exchange (PSX) in the time frame 1995-2025. The data used in the study are annual time series data for inflation, interest rate, foreign exchange reserves, foreign remittances and per capita GDP and the stock market performance is proxied by the KSE-100 Index. The advanced econometric tools such as the Augmented Dickey-Fuller (ADF) unit root test, Johansen cointegration test, Vector Error Correction Model (VECM).  The results show that all variables are of first order of integration and all variables have significant long run cointegrating relationships with PSX performance. Inflation and interest rate negatively impact the performance of the stock market, while foreign exchange reserves, remittances and per capita GDP positively impact PSX growth. From the VECM results, it is observed that the PSX seems to move towards equilibrium after short-run disequilibrium shocks.  The study contributes to the theoretical underpinning of the Efficient Market Hypothesis and Arbitrage Pricing Theory as it has shown that the macroeconomic information available in the public domain has a meaningful impact on the stock prices in Pakistan. Important policy implications for investors, regulators and policy makers are revealed by the study in the areas of macroeconomic stabilization and development of financial markets.

Keywords

Pakistan Stock Exchange, Macroeconomic Variables, KSE-100 Index, Cointegration, VECM