Cointegration and Causality Relationship Between Stock Market, Money Market and Foreign Exchange Market in Pakistan
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Journal of Systems Science and Information  2017, Vol. 5 Issue (1): 1-20    DOI: 10.21078/JSSI-2017-001-20
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Cointegration and Causality Relationship Between Stock Market, Money Market and Foreign Exchange Market in Pakistan
Ghulam ABBAS1,2, Roni BHOWMIK3, Laxmi KOJU3, Shouyang WANG1,3
1. School of Economics and Management, University of Chinese Academy of Sciences, Beijing 100190, China;
2. Sukkur Institute of Business Administration, Sindh-6500, Pakistan;
3. Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing 100190, China
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Abstract 

This paper examines the relationship between stock market(KSE-100), money market(M2 and 180 days T-bill rate), and foreign exchange market(ER:PKR/USD) in Pakistan by using monthly data covering the period from 2000:M1 to 2015:M12. The study investigates long-run equilibrium relationship between these three financial markets by employing Johansen and Juselius[1] cointegration tests. Long-run and short-run causality relationship between stock market and other macroeconomic variables is also established by employing vector error correction model(VECM) and pairwise granger causality tests. The results of multivariate cointegration test(trace test) indicate a one cointegrating vector, and the significant normalized cointegrating coefficients are evident of long run equilibrium relationship between all the selected variables. Negative and significant ECT(?1) for all variables during full sample period witness the presence of long-run causality connection among variables, while during the military regime and democratic regime, significant difference of long-run causal connections are identified across the regimes. Moreover, the results of granger causality test also indicate that there are significant variations in the causality relationship among variables across the regimes. Therefore, it is essential for forecasting, planning and policy making to consider the importance of political governance system while analyzing the historical cointegration among financial market and make the necessary adjustments accordingly.

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Articles by authors
Ghulam ABBAS
Roni BHOWMIK
Laxmi KOJU
Shouyang WANG
Key wordsKSE-100 index   money supply   interest rate   exchange rate   Pakistan     
Received: 2016-10-11;
Fund:

Supported by TWAS under the CAS-TWAS President Fellowship Program and Sukkur IBA

Cite this article:   
Ghulam ABBAS,Roni BHOWMIK,Laxmi KOJU et al. Cointegration and Causality Relationship Between Stock Market, Money Market and Foreign Exchange Market in Pakistan[J]. Journal of Systems Science and Information, 2017, 5(1): 1-20.
URL:  
http://123.57.41.99/Jwk_si/EN/10.21078/JSSI-2017-001-20     or     http://123.57.41.99/Jwk_si/EN/Y2017/V5/I1/1
 
[1] Delei SHENG. The Optimal Strategy of Reinsurance-Investment Problem for an Insurer with Dynamic Income Under Stochastic Interest Rate[J]. Journal of Systems Science and Information, 2016, 4(3): 244-257.
[2] Delei SHENG. Explicit Solution of the Optimal Reinsurance-Investment Problem with Promotion Budget[J]. Journal of Systems Science and Information, 2016, 4(2): 131-148.
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