Introduction indicators affect directly on stock market returns (Kibria,


of study

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Monetary policy
plays an important role in an economy of a country, basically monetary policy
is formulated by regulatory authority or central bank of a country to controls
the supply of money, often targeting the inflation rate or interest rate to
ensure price stability and control the value of currency. Monetary
policy is how central
banks manage liquidity to create economic growth. Liquidity is how much there
is in the money
supply. That includes credit, cash,
checks and money market mutual
funds. The most important of these
is credit. It includes loans, bonds and mortgages (Kimberly,Amadeo 2017). The regulatory
authority. The State Bank of Pakistan has the responsibility to control the
economic activities by applying monetary actions. There should be knowledge
about the main components of monetary policy which includes the inflation rate,
interest rate and money supply. These monetary policy factors directly effects the
financial and real sector of the economy. The macroeconomic variables affect
the stock market returns and due to this impact of macroeconomic variables the
market segments change and very largely affects the Stock market returns. The
industrial production Index (IPI), Foreign Direct investment (FDI), Interest
rate, Inflation rate is the key economic indicators affect directly on stock
market returns (Kibria, 2007). 

The Stock
Market plays very important role in development of economic profitability in an
economy. The Stock Market is recognized place for equity market where investors
invest based on forecasted and estimated returns. The risk can be forecasted
through the impact of macroeconomic variables. Economist believes that Stock
market indicates the position of country by threshold of developed and
developing economy (Robert, 2016). The Security and Exchange

Commission of
Pakistan (SECP) regulates the capital market of Pakistan, (SECP) was developed
in 1997 after replacing Corporate Law Authority. There were three stock
exchange in Pakistan    which were
Karachi Stock Exchange (KSE) it was established in 1994, the Lahore Stock
Exchange (LSE) was established in 1974 and Islamabad Stock Exchange it was
established in 1997 respectively. The Karachi Stock Exchange was the main and
the leading stock exchange among them with 576 companies listed and having a
market capital of 89 billion dollars, form 11 January 2016 by merging all the
individual Karachi, Lahore and Islamabad Stock exchange the Pakistan Stock
Exchange was established (PSX).The Stock Market return have a better
performance and increases growth after the merger of the stock exchanges. There
are 581 companies in the Karachi Stock Exchange (KSE) listed in the 35 sectors
in 2017. These 35 sectors include the food sector, the energy sector. Banking sector,
industry sector, textile, chemical and many other more sectors.  

The change in
monetary policy directly affect the economic activities and the stock prices.
While the easing of the monetary policy increases the overall economic activity
and stock price respond in a positive manner as indicated by (Cassola and
Morana 2004). There is less study done on relationship between monetary policy
and returns on stock market in Pakistan. Therefore the core objective of the
study is to find or to explore the relationship of the monetary policy
indicators on the stock exchange returns. The inflationary pressure in 2005 was
high, so tight monetary policy was applied by the State Bank of Pakistan to
control the inflation rate in the coming years. The highest inflation rate was
20% in 2008 which was recorded as the highest in the history of Pakistan
(Monetary policy statement August 1012). After 2008 the inflation was decreased
and was under control. The study considers the understudy and Impact between
the stock market returns and monetary policy variables.


Research Problem

The monetary
policy variables have a great impact on the Stock Market Return. The
relationship of monetary policy indicators includes Money supply, Interest
rate, Inflation rate and Exchange rates having a bi-directional relationship
with Stock Market Returns. The fluctuation in these monetary policy variables
highly effect the Stock Market Return. The change in the monetary policy
variables and Stock Market Returns shows variance in the savings and investment.

Research Objectives

The purpose of
this research or study is to find out or examine the relationship of monetary
policy indicators on the Stock Market Return and the major purpose of the study
is derived in different 3 objectives of the research.

To identify various monetary policy
factors affecting the “Stock Market Returns.”

To evaluate the relationship of Interest
rate, Inflation, Exchange rate and Money supply with Stock Market Returns.

To predict and explain the impact of
monetary policy factor on the Stock market returns.

Research Questions

research evaluates the impact of the monetary policy variables on the stock
exchange return. The research considers the following research questions which
are mentioned.

What are the various monetary policy
factors that are affecting the Stock Market Return?

What is the relationship of Interest Rate,
Inflation rate, Exchange rate and Money supply with the Stock Market Returns?

What is the Impact of monetary policy
variables on the Stock Market Return?

Scope of Study

study basically focus on the monetary policy indicators which includes Interest
rate, Money supply, Inflation rate and Exchange rates, and the impact of these
monetary policy indicators on the Stock Market return, that how these factors
affect the Stock Market Return. 


research is conducted on the basis of the data of the past 10 years and
research consider the impact of monetary policy variables on the stock market
return. There are few variables out of which four are independent variable and
one dependent variable. The data for the research is from Karachi Stock
Exchange (KSE 100 index).











Research Methodology

research methodology describes the frame work and methods based on research
paradigm and approach. This research will be conducted in Epistemological
context to explain the relation between monetary policy variables and stock
market return. The research is Quantitative research based on secondary data.

Research Design

Research philosophy

research does not only describe or shows the researcher stand point according
to the research and also shows knowledge of the researcher. The research
methods precede the research philosophy and researcher selecting the approaches
for the research (Bryman & Bell). The research does not only describe the
position of research design but also researchers view of knowledge to wish to
achieve through the research (sunder 2003). The research design includes the
research philosophy and paradigm, research approach, research strategy,
research methods, research techniques and research data collection method
(Creswell, 2009).

Research Approach

research approach describes the relation between the theory and research work,
as we have two approach either the deductive approach or inductive approach
(Bryman & Bell, 2011). The deductive approach will show the relation of
variable based on the theory that is available. The research will be conducted
based on CAPM model.



Research Type

are three types of research descriptive, explanatory and exploratory research. Since
this research is quantitative in nature so it resembles to the descriptive and
exploratory research. This research answer the question that why macroeconomic
variables effect the stock market returns and will describe the relation
between macroeconomic variables and stock market returns.

Research Strategy

research strategy basically answers the research questions of the research.
(Saunder, 2009) elaborates seven research strategies includes the Experiment,
Survey, Ethnography, Action research, case study, Grounded theory and Archival Data
research. The research is Quantitative in nature and includes secondary data.

Research Method

method describes the way the data is collected and analyze the data which is
collected according to the resources available. The selection of research
method has very important consideration based on philosophical stance of the
researcher (Zikmund, 2009). The research is quantitative and the data selected
is secondary data of dependent and independent variables.

Data Collection Methods and Sources

data used for the research is from the past 10 years monthly data from 2007 to
2017. The monthly data based on variables of Pakistan economy and all variables
are macroeconomic in nature and having a direct and indirect impact on stock
market returns.



Sources of Data Collection

data collected for the research is from stock market return (KSE) and from
State Bank of Pakistan (SBP).

Theoretical Framework

of the research describes or explains the behavior and social phenomena. The
research is Post Positivsm Paradigm and based on the theoretical framework of
CAPM (Capital Asset Pricing Theory). This research borrow the result of
empirical study of Fama (1981) and Chen (1981), elobrates the relationship of
the stock returns based on the macroeconomic variables and proves the five factor
model of understanding the return in stock market. Mishkin (1996) interest
rates decided by centeral bank hence there is the impact of other macroeconomic
and financial variables are critical and how these are bi-directional
relationship with other macroeconomic variables.


Correlative hypothesis

there is significant relationship of Effective Exchange rate (EEX) with
Pakistan Stock Exchange (PSX).

There is significant relationship of Money supply (MS) with Pakistan Stock
Exchange (PSX).

there is significant relationship of Inflation (CPI) with Pakistan Stock
Exchange (PSX).

there is significant relationship of Exports (EX) with Pakistan Stock Exchange

Regression (impact) Hypothesis

H1 there
is significant impact of Effective Exchange rate (EEX) on Pakistan Stock
Exchange (PSX).

there is significant impact of Money Supply (MS) on Pakistan Stock Exchange

there is significant impact of Inflation (CPI) on Pakistan Stock Exchange

there is significant impact of Export (EX) on Pakistan Stock Exchange (PSX).