eco new final

7/30/2019 Eco New Final

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1

INTRODUCTION

STOCK EXCHANGE MARKET

A stock exchange is an institution where the shares of publicly traded companies listed on that

particular exchange are bought and sold between members (or brokers) belonging to the

exchange. A stock market brings together people who want to buy and sell stocks and shares, and

other investments such as government bonds. In the UK, the main stock market is the London

Stock Exchange. Other major exchanges are in New York, Japan, Hong Kong, Germany, Paris

and China.

The stock market is one of the most important sources for companies to raise money. This allows

businesses to be publicly traded, or raise additional financial capital for expansion by selling

shares of ownership of the company in a public market. The liquidity that an exchange affords

the investors gives them the ability to quickly and easily sell securities. This is an attractive

feature of investing in stocks, compared to other less liquid investments such as real estate. Some

companies actively increase liquidity by trading in their own shares.

History has shown that the price of shares and other assets is an important part of the dynamics

of economic activity, and can influence or be an indicator of social mood. An economy where

the stock market is on the rise is considered to be an up-and-coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and

development.

Rising share prices, for instance, tend to be associated with increased business investment and

vice versa. Share prices also affect the wealth of households and their consumption. Therefore,

central banks tend to keep an eye on the control and behavior of the stock market and, in general,

on the smooth operation of financial system functions. Financial stability is the raison d'être of

central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and

deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an

individual buyer or seller that the counterparty could default on the transaction.[citation needed]



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KSE (Karachi Stock Exchange) is the colloquial term used for Karachi Stock Exchange

(Guarantee) Limited. This is the largest and most established stock exchange in Pakistan. The

location of KSE is in Karachi, Sindh, Pakistan and on the Stock Exchange Road in the core of

the Karachi Business District. Its foundation is dated way back 1947. It does not only deal with

Pakistani exchange but also with overseas listing.

KARACHI STOCK EXCHANGE (KSE)

KSE (Karachi Stock Exchange) has been declared the “Best Performing Stock Market of the

World for year 2002” with 654 companies listed in their market capitalization. On December 8,

2009, its recorded market capitalization is Rs. 8.561 trillion. It has the US dollar value of $120.5

billion. By July 30, their market capitalization reached a phenomenal Rs. 2.95 trillion or the

approximation of US$350 billion. On December 31, 2007, it closed its KSE 100 Index at

14075.83.

On its 6th year in the business, KSE (Karachi Stock Exchange) continues its legacy to be one of

the Best Performing Markets in the world. This recognition was declared by the International

magazine The Business Week. USA Today, another US newspaper also claimed the organization

as one of the best performing stock exchange companies in the world.

There are remarkable features of the KSE (Karachi Stock Exchange) which makes it as an

emerging key institution in Pakistan when it comes to capital formation. It has 654 listed

companies, 692 security listed on exchange and 654 ordinary share. It also has 14 preference

shares and 24 debt securities or TFC.

KSE (Karachi Stock Exchange) has the main goal of becoming the leader in the financial

institution industry. It offers fair, efficient and transparent securities market in its region. Thus,

you could simply browse the internet and find myriads of comprehensive and vital information

regarding the organization and its activity. Some of the details provided include the KSE 100Index and live Karachi stock exchange index.



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Exchange Rate

It is a rate at which one currency may be converted into another. The exchange rate is used when

simply converting one currency to another, or for engaging in speculation or trading in

the foreign exchange market. There are a wide variety of factors which influence the exchange

rate, such as interest rates, inflation, and the state of politics and the economy in each country.

Also called rate of exchange or foreign exchange rate.

There are several ways in which the exchange rate can affect the stock market. First, a

depreciating currency causes a decline in stock prices because of expectations of inflation.

Second, foreign investors will be unwilling to hold assets in currency that depreciates as that

would erode the return on their investment. In a case of USD depreciation, investors will refrain

from holding assets in the US, including stocks. If foreign investors sell their holdings of US

stocks, share prices ought to drop.

Third, the effect of exchange rate depreciation will be different for each company depending on

whether it imports or exports more, whether it owns foreign units, and whether it hedges againstexchange rate fluctuation.

Last, on a macroeconomic level, a depreciated dollar will boost the export industry and depress

the import industry. The impact on domestic output will be positive. Increasing output is seen as

an indicator of a booming economy by investors and tends to boost share prices.

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.20.3

0.4

0

2000

4000

6000

8000

10000

1200014000

16000

1 Q C Y 0 7

2 Q C Y 0 7

3 Q C Y 0 7

4 Q C Y 0 7

1 Q C Y 0 8

2 Q C Y 0 8

3 Q C Y 0 8

4 Q C Y 0 8

1 Q C Y 0 9

2 Q C Y 0 9

3 Q C Y 0 9

4 Q C Y 0 9

1 Q C Y 1 0

2 Q C Y 1 0

3 Q C Y 1 0

4 Q C Y 1 0

1 Q C Y 1 1

2 Q C Y 1 1

3 Q C Y 1 1

4 Q C Y 1 1

1 Q C Y 1 2

2 Q C Y 1 2

3 Q C Y 1 2

KSE-100

%Global economic turmoil and worsen economic conditions



4

Interest Rate (KIBOR)

Kibor is taken as the key indicator to analyze the macro economic situation of any country.

KIBOR is basically followed by the changes in inflation rates. Reason being interest rate consist

of real interest rates and inflationary changes/rates. When inflation rate raises it also give rise to

the kibor rates. Inflation normally increases because of massive borrowing from state bank which

is done through monetization and second which is issuing subsidies to the industries.

In a nutshell how the local bourse is affected by the kibor rates can be explained as; KIBOR rates

directly impacts on the company’s earning which resultantly affects the market. KIBOR in

relation with exchange rate can be viewed as negatively correlated reason being when interest

rate increases the money supply curtails and people starts putting huge money in the banks

because of increasing saving rates. Whereas on the flip side when kibor decreases money supply

increases and people start investing in forex market which resultantly depreciates PKR. A

practical view can also be seen in the graph.

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.120.14

0

10

20

30

40

50

60

70

80

90100

1 Q C Y 0 7

2 Q C Y 0 7

3 Q C Y 0 7

4 Q C Y 0 7

1 Q C Y 0 8

2 Q C Y 0 8

3 Q C Y 0 8

4 Q C Y 0 8

1 Q C Y 0 9

2 Q C Y 0 9

3 Q C Y 0 9

4 Q C Y 0 9

1 Q C Y 1 0

2 Q C Y 1 0

3 Q C Y 1 0

4 Q C Y 1 0

1 Q C Y 1 1

2 Q C Y 1 1

3 Q C Y 1 1

4 Q C Y 1 1

1 Q C Y 1 2

2 Q C Y 1 2

3 Q C Y 1 2

%

PKR /USD

Declining Foreign reserves; Reserves plunging to USD 8bnPKR/USD



6

Literature Review

The stock market is a mirror of an economy. The Karachi stock exchange (KSE) was established

in 1947. The KSE100 Index was introduced in November, 1991. The KSE100 Index consists of

100 companies. These companies are selected on the basis of market capitalization and sector

representation. These companies encompass nearly 80 percent of the total market capitalization

at Karachi Stock Exchange. Varying evidences of relationship between macroeconomic variables

and stock returns widely documented in the existing literature. Several studies explored the

predictability of many macroeconomic variables such as exchange rate, inflation, foreign direct

investment, real output, money supply, foreign reserves, prices of real estate, terms of trade, and

value of trade balance on stock prices. Due to variations in results, it was found difficult to

determine which specific macroeconomic variable could be consistent indicator of stock returns.

In the past, several studies were conducted using different macroeconomic variables. The studies

inter alia included Bhattacharya and Mukherjee (2003), Smyth and Nandha (2003), Aquino

(2004), Homma et al. (2005), Aquino (2005), Hartmann and Pierdzioch (2007), Dogan and

Yalcin (2007), Ratanapakorn and Sharma (2007), Cook (2007), Shabaz et al. (2008), Alagidede

(2008), and Humpe and Macmillan (2009). All the studies found contrasting results about

macroeconomic indicators. Very few studies such as Farooq and Keung (2004), Nishat and

Shaheen (2004) were conducted in Pakistan. It is therefore, seemed important to under take such

a study keeping in view of the volatility of KSE. The intent of the paper was to explore long run

and short run relationships between macroeconomic variables and stock prices in Karachi Stock

Exchange.

Stock market plays an important role in the economic development of a country. According to

portfolio approach, the changes in stock market lead to changes in exchange rate due to portfolio

adjustment made by investors. Here the portfolio adjustment refers to the process of inflow and



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outflow of capital. While according to traditional approach, exchange rate causes the stock prices

to move. The transmission channel of traditional approach is that exchange rate changes affect

the balance sheet of firms by changing their assets and liabilities, denominated in foreign

currency, thus changing the competitiveness of country and its export oriented firms in the

foreign markets which is ultimately, reflected in stock market. According to asset approach, the

currency price is equal to the discounted future currency prices and there may not be any link

between currency market and capital market.

In the literature, findings on relationships between capital markets and currency markets lack

consensus. Some researchers like (Abdalla et al. 1997) found causation running from exchange

rate changes to stock market returns while others found exactly the opposite one running from

stock market returns to exchange rates. Positive association running from stock returns to

exchange rates can be justified as follows. If stock returns are higher, local investors will sell

their foreign assets and will buy the domestic assets. This conversion of foreign assets into

domestic ones will increase the demand for local currency in the foreign exchange market by

putting upward pressure on its price.

Secondly, increase in stock returns increases the wealth of local investors and they also demand

more money, which ultimately results in higher interest rates. If interest rate parity theory does

not completely offset interest rate differential, then higher interest rate would attract capital from

other countries into local stock market just as Germany attracted capital from other European

countries in 1993 by increasing the interest rates.



8

Research Methodology

Karachi Stock

Exchange

Foreign ExchangeRate

Interest Rate



9

Data Collection

The data we have collected is secondary data. For the KSE variable we have selected KSE-100

Index data from 2007 to 2012 November. For interest rate the data we have selected for interest

rate is KIBOR rate obtained from source of SBP. This data is also averaged in quarterly form.

For our third variable that is exchange rate we have obtained data from open market sources of

PKR/USD exchange rates for the same time period and averaged it to quarterly basis. The

sources for the data is given at the back.

KSE-100 Index

KSE-100

1Q07 11124.132Q07 12597.52

3Q07 13150.07

4Q07 14091.65

1Q08 14459.45

2Q08 13931.97

3Q08 10155.4

4Q08 9269.01

1Q09 5777.621

2Q09 7243.642

3Q09 8238.124

4Q09 11019.84

1Q10 9801.808

2Q10 10053.09

3Q10 9966.055

4Q10 11623.74

1Q11 11865.92

2Q11 12047.79

3Q11 11727.73

4Q11 14883.28

1Q12 12372.27

2Q12 13921.45

3Q12 14883.28



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KIBOR(12 month, interest rates)

12mo KIBOR

1Q07 10.65362319

2Q07 10.277688313Q07 10.20973333

4Q07 10.18376812

1Q08 10.36638889

2Q08 11.83256579

3Q08 14.02452703

4Q08 15.39914286

1Q09 14.91253521

2Q09 13.66428571

3Q09 12.55945205

4Q09 12.68958333

1Q10 12.47863014

2Q10 12.44595588

3Q10 12.83629032

4Q10 13.62532258

1Q11 13.98611111

2Q11 13.96675325

3Q11 13.63808824

4Q11 12.14033333

1Q12 12.01587302

2Q12 12.1157377

3Q12 11.23982456

Foreign Exchange Rate (PKR/USD)

PKR/USD

1Q07 60.83727424

2Q07 60.72034481

3Q07 60.55872131

4Q07 60.9875532

1Q08 62.65731039

2Q08 66.20070851

3Q08 74.13361061

4Q08 79.52893803

1Q09 79.55652933

2Q09 80.69956111

3Q09 82.58945606



11

4Q09 83.60677302

1Q10 84.61053188

2Q10 84.64079221

3Q10 85.72512698

4Q10 85.80090873

1Q11 85.51376449

2Q11 84.64079221

3Q11 86.8469417

4Q11 87.85557222

1Q12 90.59859019

2Q12 92.17100079

3Q12 94.55486633



12

Data Analysis

To keep all the three variables we have taken relative changes of all the variables to observe the

trend with respect to change in each variable. This relative change is in terms of percentages is

then analyzed in form of graphs below.

RELATIVE COMPARISON OF THE VARIABLES

KSE-100 12mo KIBOR PKR/USD KSE-100 12mo KIBOR PKR/USD

1Q07 11124.13 10.65362319 60.837274 100 100 100

2Q07 12597.52 10.27768831 60.720345 113.24504 96.47129554 99.80779968

3Q07 13150.07 10.20973333 60.558721 118.2121274 95.83343763 99.54213443

4Q07 14091.65 10.18376812 60.987553 126.6764357 95.58971568 100.2470179

1Q08 14459.45 10.36638889 62.65731 129.9827706 97.30388156 102.9916464

2Q08 13931.97 11.83256579 66.200709 125.2410015 111.0661188 108.8160332

3Q08 10155.4 14.02452703 74.133611 91.29164044 131.6409148 121.8555754

4Q08 9269.01 15.39914286 79.528938 83.32348083 144.5437161 130.7240323

1Q09 5777.621 14.91253521 79.556529 51.93774552 139.9761841 130.7693849

2Q09 7243.642 13.66428571 80.699561 65.11649139 128.2595177 132.6482196

3Q09 8238.124 12.55945205 82.589456 74.05635479 117.8890208 135.7546949

4Q09 11019.84 12.68958333 83.606773 99.06254856 119.1104952 137.4268885

1Q10 9801.808 12.47863014 84.610532 88.11305066 117.1303876 139.0767962

2Q10 10053.09 12.44595588 84.640792 90.37190455 116.8236915 139.1265359

3Q10 9966.055 12.83629032 85.725127 89.58954211 120.4875571 140.9088886

4Q10 11623.74 13.62532258 85.800909 104.4912468 127.8937911 141.0334533

1Q11 11865.92 13.98611111 85.513764 106.6683259 131.2803247 140.5614659

2Q11 12047.79 13.96675325 84.640792 108.3032243 131.0986225 139.1265359

3Q11 11727.73 13.63808824 86.846942 105.4260983 128.0136156 142.7528481

4Q11 14883.28 12.14033333 87.855572 133.7927373 113.9549721 144.4107635

1Q12 12372.27 12.01587302 90.59859 111.2201481 112.7867281 148.919542

2Q12 13921.45 12.1157377 92.171001 125.1464393 113.7241058 151.5041592

3Q12 14883.28 11.23982456 94.554866 133.7927373 105.5023663 155.4225884



13

Relation between Karachi Stock Exchange and Foreign Exchange

Relation between Karachi Stock Exchange and Interest Rate KIBOR

0

20

40

60

80

100

120

140

160

180

1 Q 0 7

3 Q 0 7

1 Q 0 8

3 Q 0 8

1 Q 0 9

3 Q 0 9

1 Q 1 0

3 Q 1 0

1 Q 1 1

3 Q 1 1

1 Q 1 2

3 Q 1 2

KSE-100

PKR/USD

0

20

40

60

80

100

120

140

160

1 Q 0 7

3 Q 0 7

1 Q 0 8

3 Q 0 8

1 Q 0 9

3 Q 0 9

1 Q 1 0

3 Q 1 0

1 Q 1 1

3 Q 1 1

1 Q 1 2

3 Q 1 2

KSE-100

12mo KIBOR



14

Relation between Karachi Stock Exchange and Foreign Exchange and Interest Rate

KIBOR

0

2040

60

80

100

120

140

160

180

1 Q 0 7

3 Q 0 7

1 Q 0 8

3 Q 0 8

1 Q 0 9

3 Q 0 9

1 Q 1 0

3 Q 1 0

1 Q 1 1

3 Q 1 1

1 Q 1 2

3 Q 1 2

KSE-100

12mo KIBOR

PKR/USD

RELATIVE COMPARISON OF THE VARIABLES



15

Conclusion

The Karachi stock exchange (KSE) reflects all the economic changes and industrial changes

going on in the country. Whereas on economic front the country faced huge budget deficit,

declining reserves coupled with increasing interest rates scenario. These all economic pressures

lead Pakistan to approach IMF as to increase the foreign reserves and curtailing the widened

fiscal deficits. To stabilize the economic condition it took a year, where Pakistan had enough

reserves to start paying to their debt holders. Furthermore, increasing circular debt followed by

deteriorated power and energy crisis also kept the local bourse on pressure because of

comparatively decreasing earnings. Keeping In view the macroeconomic changes they also have

a severe pressure on the local market. Because the macroeconomic changes directly dictates

negatively changes on the company earnings which resultantly pressurizes the local market.

Taking into consideration the two variables KIBOR and PKR/USD parity comes into

macroeconomic framework.. When the reserves were on the declining mode Pakistan had to

approach IMF which resulted in increased interest rates as against before and somewhat kept the

exchange rate stable. When inflation rate raises it also give rise to the KIBOR rates. Inflation

normally increases because of massive borrowing from state bank which is done through

monetization and second which is issuing subsidies to the industries. In a nutshell how the local

market is affected by the KIBOR rates can be explained as; KIBOR rates directly impacts on the

company’s earning which resultantly affects the market. KIBOR in relation with exchange rate

can be viewed as negatively correlated reason being when interest rate increases the money

supply curtails and people starts putting huge money in the banks because of increasing saving

rates. Whereas on the flip side when KIBOR decreases money supply increases and people start

investing in FOREX market which resultantly depreciates PKR.



16

REFERENCE

www.indexmandi.com

www.economictrade.com

www.wikipedia.com

http://www.investopedia.com/ask/answers/199.asp#ixzz2DOvthj4G

www.tradingeconomics.com

www.kse.com

Gary S. Moore, Sue L. Visscher, (1993),"Stock Returns, Inflation, and the Business Cycle", American

Journal of Business, Vol. 8 Iss: 1 pp. 45 – 50

J.M. Geyser, G.A. Lowies, (2001),"The impact of inflation and stock prices in two SADC countries",

Meditari Accountancy Research, Vol. 9 Iss: 1 pp. 109 - 122

http://www.indexmandi.com/


http://www.economictrade.com/


http://www.wikipedia.com/




http://www.tradingeconomics.com/


http://www.kse.com/

http://www.kse.com/

http://www.kse.com/






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