Global Journal of Management and Business Research: C

Finance
Volume 15 Issue 10 Version 1.0 Year 2015
Type: Double Blind Peer Reviewed International Research Journal
Publisher: Global Journals Inc. (USA)
Online ISSN: 2249-4588 & Print ISSN: 0975-5853

Financial Crisis in Stock Exchanges-An Empirical Analysis of

the Factors that can affect the Movement of Stock Market
Index
By Rabianajaf, Khakan Najaf, Imran Hussain Shah & Amir Iqbal
University of Lahore, Pakistan
Abstract- This paper focuses on the factors that can affect the movement of stock market index,
which creates volatility in the prices of companies listed in the stock market. Stock Market
Efficiency Theory focuses on the market news, information, economic conditions, etc. Good or
bad news also impact on the market behavior. Initial Public Offering (IPO) is considered as
convenient way to raise funds from market. Therefore, important econometric advantages in
examining the role of stock markets in the relationship between financial development and
growth using time series methods. Summing up the test indicates that the consumer price index
and political stability have no relation with the fluctuation in Karachi stock exchange kse100.
Secondly the test shows one variable associates with other variable.
Keywords: financial crisis, KSE, IPO, FDI, stock market efficiency.
GJMBR - C Classification : JEL Code: O16

FinancialCrisisinStockExchanges-AnEmpiricalAnalysisoftheFactorsthatcanaffecttheMovementofStockMarketIndex

Strictly as per the compliance and regulations of:

© 2015. Rabianajaf, Khakan Najaf, Imran Hussain Shah & Amir Iqbal. This is a research/review paper, distributed under the terms
of the Creative Commons Attribution-Noncommercial 3.0 Unported License http://creativecommons.org/licenses/by-nc/3.0/),
permitting all non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited.
 Financial Crisis in Stock Exchanges-An
Empirical Analysis of the Factors that can affect
the Movement of Stock Market Index
Rabia Najaf α, Khakan Najaf σ, Imran Hussain Shah ρ & Amir Iqbal Ѡ

Abstract- This paper focuses on the factors that can affect the
Objectives of the Study

2015
movement of stock market index, which creates volatility in the II.
prices of companies listed in the stock market. Stock Market

Year
Efficiency Theory focuses on the market news, information, To determine the relationship between KSE100,
economic conditions, etc. Good or bad news also impact on exchange rate, inflation rate, foreign direct investment
the market behavior. Initial Public Offering (IPO) is considered and political events in Pakistan. To determine the
as convenient way to raise funds from market. Therefore, effective change caused by the independent variables 55
important econometric advantages in examining the role of on dependent variables. To facilitate the buyers and
stock markets in the relationship between financial sellers in the stock market so that they can trade

Global Journal of Management and Business Research ( C ) Volume XV Issue X Version I

development and growth using time series methods. effectively and efficiently, can make timely entry and
Summing up the test indicates that the consumer price index exist while considering the above mentioned factors. To
and political stability have no relation with the fluctuation in
analyze the important dimensions of stock index
Karachi stock exchange kse100. Secondly the test shows one
variable associates with other variable. Where FDI is positively investment in Pakistan in the light of the various studies
correlated while exchange rate, interest rate, CPI and political carried out by different researchers.
stability are negatively correlated, that shows the negative a) Significance Of The Study
relationship between kse100 and exchange rate that if the
The study explains the factors affecting the
exchange rate increases then the kse100 index will decrease.
movement and patterns of share prices in stock
Keywords: financial crisis, kse, ipo, fdi, stock market
exchange.
efficiency.

I. Introduction III. Literature Review

S
tock market development is an important indicator Nieh and Lee (2001) examined both short-run
of economic growth. Levine and Zarkos (1998) movements and long-run equilibrium relationships
argued that market capitalization and index growth between stock prices and exchange rates by using daily
reflect economic growth (Levine & Zervos 1998). Many closing stock market indices and foreign exchange rates
studies have concentrated on cross section regressions for the time period from October 1993 to February 1996,
which as pointed by Levine and Renelt (1992) among by applying Engle-Granger two steps. It has been
others should be viewed with caution. Time series observed that no long run equilibrium relationship exists
analysis can address the issue (Levine & Renelt 1992). between stock prices and exchange rate. However, in
Purpose of this research is to analyze why the stock the short-run the two markets have a one-day predictive
market fluctuate and does the exchange rate, inflation power in certain countries (Nieh& Lee 2001). Bodnar
rate, foreign direct investment and political events effect and Gentry (1993) examined the relationship between
the movement. Research indicates that fluctuation is changes in exchange rates and industry values where
effected by change occurred in exchange rate, inflation the return on the industry portfolio is regressed against
rate, foreign direct investment, political events and many the return on the nominal stock market and percentage
other factors. So the study of these factors can help to change in the trade-weighted nominal exchange rate,
predict the change in share price that can help in and found that in all three countries, between 20 to 35
avoiding loses caused by the bubble created. percent of the industries reveal statistically significant
exchange rate exposure (Bodnar& Gentry 1993). Jorion
(1990) studied the exchange rates and commons stocks
Author α: Ph.D Scholar, Lahore School of Accounting and Finance,
University of Lahore Pakistan. e-mail: rabianajaf@hotmail.com
of companies 287 U.S. multinationals with and without
Author σ: Lecturer, Lahore School of Accounting and Finance, foreign operations, and found that the degree of a firm’s
University of Lahore Pakistan. e-mail: khakan.nj@gmail.com foreign involvement positively affects the exposure
Author ρ: Professor, Lahore School of Accounting and Finance, estimates. On the other hand, domestic firms without
University of Lahore Pakistan. e-mail: Imranbukhari.uol@gmail.com
Author Ѡ: Head of Department, Lahore School of Accounting and
foreign operations have very similar exposures (Jorion
Finance, University of Lahore Pakistan. 1990). Abdalla and Murinde (1997) examined the
e-mail: amiriqbal.uol@gmail.com relationship between stock prices and exchange rates
© 20 15 Global Journals Inc. (US)
 Financial Crisis in Stock Exchanges-An Empirical Analysis of the Factors that can affect the Movement of
Stock Market Index

for emerging markets such as India, Korea, Pakistan, exchange rates are not useful tools to predict stock
and the Philippines for the period from 1985 to 1994 market movements. Boone, Giorno and Richardson
using co-integration techniques, and reported (1998) studied the likely influence of stock market
unidirectional causality from exchange rates to stock fluctuations, using the Johansen technique, and
prices for all countries except the Philippines (Abdalla & suggested that a 20 percent fall in equity prices in G7
Murinde 1997). Bahmani-Oskooee and Sohrabian stock markets, would have a significant impact on the
(1992) studied bidirectional causality between changes world economy (Boone, et al., 1998). Khan and Ahmed
of exchange rates and stock prices by employing the (2008) studied the relationship between aggregate stock
Granger causality test and standard (Engle and market trading volume and daily stock returns during in
Granger) co-integration techniques for the data of U.S. which the events are happened in Pakistan and
stock market index for the period from 1973 to 1988, evaluated the instability in the stock market due to the
and found that the short-term horizon, bidirectional events, and concluded that the event effect the value of
2015

causality exists between exchange rate and the U.S. Pearson correlation and due to event the value is
stock market index (Oskooee & Sohrabian 1992). decrease from their pre event value. Robbani and
Year

Johnson and Soenen (2004) studied the effects of U.S. Anantharaman (2002) have studied the effect of political
equity markets on the value of the U.S. dollar, for the events on the prices of some of the selected emerging
56 period from 1971 to 2002, and found that the stock market indices for the four-year period, from July
significance of the exposure estimates changes for each 1, 1997 to June 30, 2001 and for each market, results
U.S. dollar structural change (i.e. strong or weak U.S. also support the notion that emerging stock markets too
Global Journal of Management and Business Research ( C ) Volume XV Issue X Version I

dollar period) (Johnson & Soenen 2004). Soenen and are of semi-strong forms efficiency in the sense that they
Hannigar (1988) studied the linkage between stock reflect not only relevant economic information but also
prices and U.S. effective exchange rates, and found that important political information through their pricing
stock prices and the value of the U.S. dollar are (Anantharaman & Robbani 2002).
negatively correlated (Soenen & Hennigar 1988).
Aggrawal (2004) attempted to determine the relationship IV. Methodology
between changes in stock indices and changes in dollar
To assess the desired results, foreign direct
exchange rates under a floating exchange rate regime,
investment, exchange rate, inflation rate, interest rate
and observed that stock prices and U.S. exchange rates
and political situation are considered as regressers and
are positively correlated and stronger over a short term
fluctuation in stock market as transgressers. SPSS is
horizon than over a long term horizon (Aggarwal 2004).
used for the empirical analysis through regression and
Zohrabyan (2005) studied the effect of currency
correlation.
movements on Stock Markets because both foreign
currency markets and stock markets are important V. Data Collection
indicators of economy-wide performance, and much
attention has been given to modeling both markets, by The sample of 59 months starting from Jan 5,
both OLS regression and more sophisticated time series 2005 to Nov 9, 2008 is observed for completion of this
methods. In addition, causality will be examined through study. Data is collected from the reliable sources of
Directed Acyclic Graphs (DAG). The results support the State Bank of Pakistan, Federal Bureau of Statistics and
evidence that exchange rates and stock markets are the Karachi Stock Exchange.
weakly correlated to each other, which implies that

KSE100 = C + [1 (ex.rate) + [2 (i.rate) + [3 (cpi) + [4 (fdi) + [5 (p.stay) + £i

Where
KSE: Karachi Stock exchange
Βn: Slop
B0 : Constant
X1: Exchange Rate
X2: Interest Rate
X3: Inflation Rate
X4: Foreign Direct Investment
X5: Political Stability

© 2015
1 Global Journals Inc. (US)
Financial Crisis in Stock Exchanges-An Empirical Analysis of the Factors that can affect the Movement of
Stock Market Index

VI. Empirical Analysis acceptance or rejection of hypothesis and to see the

nature of relationship between variables. In inferential
Descriptive analysis used to describe the data portion the study tested the relationship between
by using descriptive summary as well as, scattered kse100, exchange rate (ex.rate), interest rate (i.rate),
plots, correlation and regressions analysis with normal inflation rate (cpi), foreign direct investment (fdi) and
distribution curve. Inferential analysis used to describe political stability (p.stay).
the relation between variables by checking the
Table1 : Descriptive Analysis of Data
N Minimum Maximum Mean Std. Deviation
KSE100 59 5377.00 15125.00 10119.6102 2596.52069
EX.RATE 59 59.37 84.20 65.8354 8.72787
I.RATE 59 7.50 15.00 10.5593 2.28391

2015
CPI 59 6.20 25.30 11.7675 5.75685
FDI 59 70.07 1262.87 333.1211 235.44328

Year
P.STAY 59 .00 1.00 .7458 .43917
Valid N (listwise) 59

Table 1 presents the descriptive statistics that 57

show the overall picture of all the six variables. In the
above table the mean values and the values of standard

Global Journal of Management and Business Research ( C ) Volume XV Issue X Version I

deviation of all the six variables have been shown. Mean
value provides the idea about the central tendency of
the values of a variable. The mean of different variables
like kse-100 (mean: 10119), Ex.Rate (mean: 65.835),
I.Rate (mean: 10.55), CPI (mean: 11.76), FDI (mean:
333.12) and P.Stability (mean: 0.745). Standard
deviation gives the idea about the dispersion of the
values of a variable from its mean value. In kse100 the
maximum value is 15125 and the minimum value is
5377. The standard deviation is 2596.6, means that the
value of kse100 can increase 2596.6 and can decrease
2596.6. In exchange rate the maximum value is 84.20
and the minimum value is 59.37. The standard deviation
is 8.727, means that the value of exchange rate can
increase 8.727 and can decrease 8.727. In interest rate
the maximum value is 15 and the minimum value is 7.5.
The standard deviation is 2.28, means that the value of
exchange rate can increase 2.28 and can decrease
2.28.
In CPI inflation rate the maximum value is 25.3
and the minimum value is 6.2. The standard deviation is
5.756, means that the value of CPI inflation can increase
5.756 and can decrease 5.756. In FDI the maximum
value is 1262.87 and the minimum value is 70.07. The
standard deviation is 235.44, means that the value of
FDI can increase 235.44 and can decrease 235.44. In
political stability the maximum value is 1 and the
minimum value is 0. The standard deviation is 0.439,
means that the value of political stability can increase
0.439 and can decrease 0.439.
Scatter plot or graph of two variables shows
how the scores for an individual on one variable
associates with his or her scores on the other variable
and if the correlation is high positive the plotted point will
be close to a straight from the lower left corner of the
plot to the upper right. The linear regression line will
slope downward from the upper left to the lower right if
the correlation is high negative.
© 20 15 Global Journals Inc. (US)
 Financial Crisis in Stock Exchanges-An Empirical Analysis of the Factors that can affect the Movement of
Stock Market Index
2015
Year

58
Global Journal of Management and Business Research ( C ) Volume XV Issue X Version I

Figure 1 : Linear Regression of Variables

Figure 1 shows the results of scatter plot matrix political stability while positive relation with FDI.
and linear regression among variables. Linear Correlation is used to check the mutual relationship
description in scatter plot shows negative relation of among variables. For checking the relationship we will
KSE-100 index with exchange rate, interest rate, CPI and make two hypothese
: Null (H0) and alternative (H1).
H1: there is relationship between kse100 and exchange rate
H1-0: there is no relationship between kse100 and exchange rate
Figure 1 shows the results of scatter plot matrix political stability while positive relation with FDI.
and linear regression among variables. Linear Correlation is used to check the mutual relationship
description in scatter plot shows negative relation of among variables. For checking the relationship we will
KSE-100 index with exchange rate, interest rate, CPI and make two hypotheses: Null (H0) and alternative (H1).
H1: there is relationship between kse100 and exchange rate H1-0: there is no relationship between kse100 and
exchange rate H2: there is relationship between kse100 and interest rate H2-0: there is no relationship between
kse100 and interest rate H3: there is relationship between kse100 and CPI inflation rate
H3-0: there is no relationship between kse100 and CPI inflation rate H4: there is relationship between kse100 and FDI
foreign direct investment H4-0: there is no relationship between kse100 and FDI foreign direct investment H5: there is
relationship between kse100 and political stability H5-0: there is no relationship between kse100 and political stability.

© 2015
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Financial Crisis in Stock Exchanges-An Empirical Analysis of the Factors that can affect the Movement of
Stock Market Index

Table 2 : Correlations among Variables

Correlations
KSE100 EX.RATE I.RATE CPI FDI P.STAY
KSE100 Pearson Correlation 1 -.457** -.279* -.268* .368** -.296*
Sig. (2-tailed) .000 .032 .040 .004 .023
N 59 59 59 59 59 59
EX.RATE Pearson Correlation -.457** 1 .915** .627** -.157 .119
Sig. (2-tailed) .000 .000 .000 .235 .369
N 59 59 59 59 59 59
I.RATE Pearson Correlation -.279* .915** 1 .719** .019 .075
Sig. (2-tailed) .032 .000 .000 .889 .570
N 59 59 59 59 59 59

2015
CPI Pearson Correlation -.268* .627** .719** 1 .099 .141
Sig. (2-tailed) .040 .000 .000 .458 .286

Year
N 59 59 59 59 59 59
FDI Pearson Correlation .368** -.157 .019 .099 1 -.092
Sig. (2-tailed) .004 .235 .889 .458 .489
N 59 59 59 59 59 59 59
P.STAY Pearson Correlation -.296* .119 .075 .141 -.092 1
Sig. (2-tailed) .023 .369 .570 .286 .489

Global Journal of Management and Business Research ( C ) Volume XV Issue X Version I

N 59 59 59 59 59 59

Table-2 represents the correlations where FDI is political stability intention is lesser than 0.33 in absolute
positively correlated r=.368 while exchange rate, interest terms, which shows the weak correlation between them.
rate, CPI and political stability are negatively correlated All the above correlations are statistically significant at
(r=-.457, - .279, -.268, -.296 respectively). The less than five percent level of significant. In the case of
magnitudes of the above discussed two correlations are these correlations the null hypothesis that were stated
greater than 0.33 in the absolute terms, which shows the above of no correlation are rejected as the P-values are
moderate correlations between the said pairs of the lesser than 0.05 and following statement are found
variables but the correlation of interest rate, CPI and correct.
H1: there is relationship between KSE100 and exchange rate. They will change 45.7% in same direction and change
54.3% due to other factor.
H2: there is relationship between kse100 and interest rate. They will change 27.9% in same direction and change
72.1% due to other factor.
H3: there is relationship between kse100 and CPI inflation rate. They will change 26.8% in same direction and change
73.2% due to other factor.
H4: there is relationship between kse100 and FDI foreign direct investment. They will change 36.8% in same direction
and change 63.2% due to other factor.
H5: there is relationship between kse100 and political stability. They will change 29.6% in same direction and change
70.4% due to other factor.
Regression is used to check the effect size of
independent variable to dependent variable.
Table 3 : Regression of Variables
Mode R R Square Adjusted R Square Std. Error of the Estimate
l
1 .649a .421 .366 2067.00267
a. Predictors: (Constant), P.STAY, I.RATE, FDI, CPI, EX.RATE

The modal summary depicts the values of R- change will be due to the independent variables
square that observed the changes in dependent and (exchange rate, interest rate, CPI, FDI and political
independent variables, the value of R square is .421 that stability) and rest 57.5% is because of other factors.
mean if kse100 is changed 100 % than the 42.5%
H2: there is relationship between kse100 and interest rate H2-0: there is no relationship between kse100 and interest
rate H3: there is relationship between kse100 and CPI inflation rate

© 20 15 Global Journals Inc. (US)

 Financial Crisis in Stock Exchanges-An Empirical Analysis of the Factors that can affect the Movement of
Stock Market Index

Table 4 : f-test among variables

ANOVA
ANOVA
Si
Model Sum of Squares Df Mean Square F g.
1 Regression 1.646 5 3.292 7.705 .000a
Residual 2.264 53 4272500.000
Total 3.910 58
a. Predictors: (Constant), P.STAY, I.R, FDI, CPI, EX.RATE
b. Dependent Variable: KSE100 | |
F-test will determine the combine relationship of
independent variables on dependent variables and the
2015

value of f is 7.705
Year

H0: independent variables jointly don’t affect the dependent variables H1: independent variables jointly do affect the
dependent variables
60 The significance value is .000 and it is less than independent variables jointly do affect the dependent
0.05 so we will reject H0and accept H1 that indicates variables.
Table 5 : ANOVA table
Global Journal of Management and Business Research ( C ) Volume XV Issue X Version I

Coefficients
Unstandardized Standardized
Si
Model Coefficients Coefficients t g.
B Std. Error Beta
1 (Constant) 21470.14 2997.028 7.164 .000
4
EX.RATE -301.024 86.341 -1.012 -3.486 .001
I.RATE 915.057 356.171 .805 2.569 .013
CPI -92.439 69.260 -.205 -1.335 .188
FDI 2.176 1.285 .197 1.694 .046
P.STAY -1115.870 631.985 -.189 -1.766 .083
a. Dependent Variable: KSE100

Coefficient table presents the results of the to find the impact of independent on dependent
regression analysis. The objective of the regression in variables. The specified regression equation takes the
this study is to find such an equation that could be used following form:
a) Regression Equation
KSE = β0 + β1X1 + β2X2 + β3X3 + β4LN(X4) + β5X5 + ei

Now put the values of independent variables in equation.

Kse100 = 21470 - 301.024(1) + 915.05(1) - 92.437(1) +2.176(1) - 1115.87(1) + £i Kse100 = 20877.86
H1: there is effect of exchange rate on kse100 H1-0: there is no effect of exchange rate on kse100 H2: there is effect of
interest rate on kse100
H2-0: there is no effect of interest rate on kse100
H3: there is effect of CPI on kse100
H3-0: there is no effect of CPI on kse100
H4: there is effect of FDI on kse100
H4-0: there is no effect of FDI on kse100
H5: there is effect of P.stay on kse100
H5-0: there is no effect of P.stay on kse100
H1: the significance level is .001 which is less than .05 so H1-0 will be rejected and H1 is accepted that there is effect
of exchange rate on kse100, means that if value of exchange rate decreases
1 unit kse100 will increase 301 units.

© 2015
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Financial Crisis in Stock Exchanges-An Empirical Analysis of the Factors that can affect the Movement of
Stock Market Index

H2: the significance level is .013 which is less than .05 so H2-0 will be rejected and H2 is accepted that there is effect
of interest rate on kse100, means that if value of interest rate increases 1 unit kse100 will decrease 915 units.
H3: the significance level is .188 which is greater than .05 so H3 will be rejected and H3-0 will be accepted that there is
no effect of CPI on kse100.
H4: the significance level is .046 which is less than .05 so H4-0 will be rejected and H4 will be accepted that there is
effect of FDI on kse100, means that if value of FDI increase 1 unit kse100 will increase 2.17 units.
H5: the significance level is .083 which is greater than .05 so H5 will be rejected and H5-0 will be accepted that there is
no effect of P.stay on kse100.
The result shows that there is no effect of CPI different researchers. The Karachi stock exchange has
and political stability on KSE100 while exchange rate, great importance in the Asia as it is one on the emerging
interest rate and FDI affect the KSE100. market of the world. That is the mean reason that

2015
foreigners hold major stake in the Karachi stock
VIII. Conclusion

Year
exchange
Summing up the test indicates that the IX. Policy Recomendations
consumer price index and political stability have no 61
relation with the fluctuation in Karachi stock exchange The study conducted may facilitate the buyers
kse100. Secondly the test shows one variable and sellers and give a substantial clue to the market

Global Journal of Management and Business Research ( C ) Volume XV Issue X Version I

associates with other variable. Where FDI is positively practitioner for minimizing risks while investing in stocks
correlated while exchange rate, interest rate, CPI and market and also give a clue that every event has
political stability are negatively correlated, that shows different effect the on stock market which includes the
the negative relationship between kse100 and exchange trading volume and stock return. Recommendations are
rate that if the exchange rate increases then the kse100 as follows:
index will decrease. 1. The relationship between the variables also shows
The magnitudes of FDI and exchange rate show the linkage to somehow predict the prices prevailing
the moderate correlations between the said pairs of the in the stock market on the basis of variables, so one
variables whereas the correlation of interest rate, CPI must consider that factors before investing in the
and political stability shows the weak correlation. All the stock market.
correlations are statistically significant at less than five 2. Foreign direct investment can boost market
percent level of significant. There was negative activities so more the foreign inflows better will be
relationship between kse 100 and interest rate was the performance.
observed, this means that if the interest rate increase 3. Stable exchange rate can boost the market
then the kse100 index will decrease. Negative relation performance and foreigners to invest more in the
was also observed in CPI, exchange rate and kse100, market.
means that if the CPI inflation rate increase then the 4. Stable interest rate or lower interest rate will attract
kse100 index will decrease. This means that if the more investors to the market.
exchange rate increase then the kse100 index will 5. Political situation has almost no effect on the market
decrease. Positive relationship between kse100 and FDI and the effect is for a short period of time like in
was observed. This means that if FDI will increase in the case of death of any leader.
country it will affect positively then the kse100 will References Références Referencias
increase.
The FDI, interest rate and exchange rate have 1. Abdalla I. and Murinde V. (1997): Exchange rate and
relationship between the Karachi stock exchange while stock price interactions in emerging financial
the consumer price index and political stability have no markets: evidence on India, Korea, Pakistan and the
relation with the fluctuation in Karachi stock exchange Philippines. Applied Financial Economics,7(1): 25-
kse100. 35.
It shows that there is effect of exchange rate on 2. Aggarwal R. (2004): Exchange rates and stock
kse100, means that if value of exchange rate decreases prices: A study of the US capital markets under
1 unit kse100 will increase 301 units. The effect of floating exchange rates. Akron Business and
interest rate on kse100 shows that if value of interest Economic Review,12: 7-12.
rate increases 1 unit kse100 will decrease 915 units. The 3. Anantharaman and Robbani (2002: An Econometric
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increase 1 unit kse100 will increase 2.17 units in Emerging Markets. Pittsburgh, Pennsylvania,
The study gives the touch to highlight the Second Annual ABIT Conference.
important dimensions of stock index investment in 4. Bodnar G.M. and Gentry W.M. (1993): Exchange
Pakistan in the light of the various studies carried out by rate exposure and industry characteristics: Evidence
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Stock Market Index

from Canade, Japan and the USA. Journal of

International Money and Finance,12: 29-45.
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Banks and Economic Growth. American Economic

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