The Impact of Stock Market Shocks on Macroeconomic Variables of Pakistan (An Application of SVAR Methodology)
Author: Imtiaz Hussain

This study aims to investigate the impact of stock market shock on macroeconomic variables of Pakistan. We took monthly data from IFS on Share prices (SP), Industrial Manufacturing Production Index as a measure of GDP, Exchange Rate (EX), Interest Rate (IR), Money Supply (M2) and Consumer Price Index (CPI) for the Period 1991-1 to 2015-12. Aloof from this, we have applied structural vector autoregressive (SVAR) model proposed by Blanchard and Quah (1989) for imposition of long run restriction on variables. We employed Monthly unit root proposed by Beaulieu and Mirron (1992). Our results found that unit root exist at level but their first differences showed there is no seasonal unit root at zero frequency. We also found that autocorrelation does not exist in the model. our diagnostic tests show that residuals are normally distributed. our impulse response function reported the responses of share prices into macroeconomic variables, that exchange rate and consumer price index are responding negative initially, while other variables are responding positive. Our variance decomposition shows that majority of variation received by interest rate in the short run and in the long run as shock comes from share prices in Pakistan. Finally, our SVAR methodology found that share prices have positive but insignificant impact on supply of money, industrial manufacturing production index and consumer price index, meaning that shocks are not transmitting into these variables. On the other hand, we also found that shock of share prices has negative but significant impact on Interest rate and exchange rate in Pakistan and there is significant transmission mechanism from share prices to interest rate and exchange rate in case of Pakistan. Supervisor:- Dr. Hafsa Hina

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Keywords : Impulse Response, Macroeconomic Variables, Stock Market Shocks, SVAR, Unit root, Variance Decomposition
Supervisor: Hafsa Hina

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