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1 Behavioral Finance 38553

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20 views3 pages

1 Behavioral Finance 38553

article

Uploaded by

sadiaimam103
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Behavioral Finance

Faculty of Management
Sciences
Behavioral Finance

BEHAVIORAL FINANCE

ASSIGNMENT

SUBMITTED TO

PROF. IMRAN

SUBMITTED BY

SADIA IMAM

38553

1
Behavioral Finance

Topic

 limits of Arbitrage

Summary:

In this study, the researcher delved into how inflation, exchange rates, and interest
rates impact the Pakistan Stock Exchange's (PSX) KSE-100 index performance from
2013 to 2020. They utilized various statistical methods such as the ADF test,
Ordinary Least Squares regression, and others to analyze the data. The findings
revealed that while exchange rates positively influence the PSX KSE-100 index,
inflation and interest rates have negative effects. However, the link between inflation
and the index was not significant. The ECM analysis showed that 20% of the index's
variation is explained by these factors in the short run, leaving 80% unexplained. The
VAR test indicated that variations in exchange rates, inflation, and interest rates
contribute to fluctuations in the PSX KSE-100 index performance.

 Certainly! In this research, the investigator explored how three key economic
factors
 Inflation
 exchange rates
 interest rates
 Impact the performance of the Pakistan Stock Exchange's KSE-100 index
over the period spanning 2013 to 2020.

To analyze this relationship, a variety of econometric techniques were employed,


including the Augmented Dickey-Fuller (ADF) test, Ordinary Least Squares (OLS)
regression model, tests for residual analysis for serial correlation, co-integration
testing, Error Correction Model (ECM), variance decomposition (VAR), and Pairwise
Granger causality test. The results of the analysis revealed several key insights.
Firstly, it was found that exchange rates exert a positive influence on the KSE-100
index, indicating that a stronger exchange rate is associated with higher stock
market performance. Conversely, both inflation and interest rates were found to have
adverse effects on the index, although the impact of inflation was statistically
insignificant. This implies that rising inflation and interest rates are associated with
lower stock market performance in Pakistan.

Furthermore, the ECM analysis suggested that in the short run, only 20% of the
variation in the KSE-100 index can be explained by fluctuations in inflation,
exchange rates, and interest rates, leaving the majority (80%) of the variation
unexplained. This underscores the complexity of factors influencing stock market
performance beyond these three variables.

2
Behavioral Finance

Lastly, the VAR test results provided insights into the magnitude of the impact of
fluctuations in exchange rates, inflation, and interest rates on the KSE-100 index
performance. Specifically, the analysis indicated that variations in exchange rates
account for 1.67% of the variation in the index, while inflation and interest rates
contribute 14.25% and 3.90%, respectively.

Overall, the findings of this study contribute to a better understanding of the


dynamics between macroeconomic variables and stock market performance in
Pakistan, providing valuable insights for investors, policymakers, and researchers
alike.

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