LONG-RUN AND SHORT-RUN RELATIONSHIP BETWEEN MACROECONOMIC VARIABLES AND STOCK PRICES IN PAKISTAN The Case of Lahore Stock Exchange

The movements in the stock prices are an important indicator of the economy. The intention of this study was to examine long-run and short-run relationships between Lahore Stock Exchange and macroeconomic variables in Pakistan. The monthly data from December 2002 to June 2008 was used in this study. The results revealed that there was a negative impact of consumer price index on stock returns, while, industrial production index, real effective exchange rate, money supply had a significant positive effect on the stock returns in the long-run. The VECM analysis illustrated that the coefficients of ecm1 (–1), and ecm2 (–1) were significant with negative signs. The coefficients of both error correction terms showed high speed of adjustment. The results of variance decompositions revealed that out of five macroeconomic variables consumer price index showed greater forecast error for LSE25 Index.