Multivariate Granger causality between macro variables and KSE 100 index: evidence from Johansen cointegration and Toda & Yamamoto causality

The pursue of this article is to scrutinise the long-haul relationship between stock returns of the KSE 100 index and monetary indicators such as rate of exchange, inflation, and interest rates. Month-to-month data from the KSE 100 index and monetary variables were extracted for the period January 1...

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Bibliographic Details
Published in:Economic research - Ekonomska istraživanja 2017-12, Vol.30 (1), p.1497-1521
Main Authors: Ahmed, Rizwan Raheem, Vveinhardt, Jolita, Streimikiene, Dalia, Fayyaz, Majid
Format: Article
Language:English
Subjects:
Causality
Change agents
Changes
Cointegration analysis
Economic models
Economic theory
Equity
Foreign exchange rates
Granger causality
Indexes
Inflation
Inflation rates
Interest rates
Johansen cointegration
KSE 100 index
macroeconomic variables
Monetary policy
Multivariate analysis
Prices
Rates of return
Toda and Yamamoto causality
variance decomposition
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Summary:The pursue of this article is to scrutinise the long-haul relationship between stock returns of the KSE 100 index and monetary indicators such as rate of exchange, inflation, and interest rates. Month-to-month data from the KSE 100 index and monetary variables were extracted for the period January 1992 to November 2015. We transformed the data series into a stationary form by employing the augmented Dickey-Fuller method. The Johansen cointegration approach reinforces the long-haul association between equity prices and monetary indicators, for instance the rate of exchange, inflation, and interest rates. Results of the Granger and Toda and Yamamoto causalities demonstrate the unidirectional causal relationship between interest rate and KSE 100 index; the one-way causation existed from interest rate to equity returns for the KSE100 index. The analysis of the impulse response function concludes that the changes in the KSE 100 index happened due to its own shocks. However, changes in exchange and inflation rates were experienced because of the interest rate. The outcome of variance decomposition demonstrated that most of the changes in the KSE 100 index are because of its own shocks. Thus, it is concluded that the predictability of the equity prices for the KSE 100 heavily relied on exchange rate, inflation, and interest rate variations.
ISSN:1331-677X
1848-9664
DOI:10.1080/1331677X.2017.1340176