Impact of Interest Rate and Inflation on Stock Market Index: A case of Pakistan

Abstract

The multidimensional impact of inflation has been widely investigated empirically. In continuation of the same, it is argued that inflation has a strong influence over stock market indexes. In this discussion influence of interest rate on stock market index have also a prime importance. This paper attempts to study the impact of interest rate and inflation on stock market index. We have taken KSE100 as dependent variable and CPI, REER, and WALR as independent variables. We have found CPI and WALR statistically significant at 95% level. Our results show the value of R2 coefficient of determination as 0.70, which means that 70% variation in KSE100 index is being explained by CPI, REER, and WALR (independent variables). The beta coefficient of inflation shows its positive relationship with KSE100, which means that an increase in inflation can raise the KSE 100 index value. However, persistent inflation will eventually build high future expectations about higher inflation, resulting in a negative impact on KSE100 index. The coefficient of WALR shows a significant and negative relationship of WALR with KSE 100.