Macroeconomic Factors and Stock Market Inefficiency: Role of Trading Effect

International Journal of Economics and Management Studies

© 2020 by SSRG - IJEMS Journal

Volume 7 Issue 3

Year of Publication : 2020

Authors : Faisal Khan

10.14445/23939125/IJEMS-V7I3P102

How to Cite?

Faisal Khan, "Macroeconomic Factors and Stock Market Inefficiency: Role of Trading Effect," SSRG International Journal of Economics and Management Studies, vol. 7,  no. 3, pp. 8-14, 2020. Crossref, https://doi.org/10.14445/23939125/IJEMS-V7I3P102

Abstract:

This study examines the role of the trading effect in determining the lagged effect of economic factors on stock returns in an emerging market of Pakistan. Study applied generalized autoregressive conditional heteroskedasticity model GARCH (1, 1). The results of the study indicatethat three lags for exporting firms and four lags for the non-exporting firms are the most common lags for the significant positive impact of exchange rate on stock returns. Second, resting on the overall significant negative lagged effect of the risk-free rate, the results uncovered that it is maximized at one lag in the case of exporting firms while at three lags for non-exporting firms. More so, the results uncovered that the significant negative impact of inflation on stock returns is maximized at lag one for both exporting and non-exporting firms. Moreover, it is also deducted that with the increase in lags from lag one to lag four, for both the exporting as well as non-exporting firms, the significant impact of inflation on stock returns shifts from negative to positive. Furthermore, results depicted that the statistically significant positive impact of real activity on stock returns is maximized at two lags for both exporting and non-exporting firms. Next, with the increases in lags from lag one to lag five, the significant impact of money supply on stock returns becomes more and more positive for both the exporting as well as non-exporting firms. Furthermore, it is found that in the case of exporting firms, the statistically significant positive effect of oil prices on stock returns is maximized at two lags, while for non-exporting firms, it is maximized at lag one. However, the statistically significant but negative effect of oil prices on stock returns is maximized at lag three in the case of exporting firms, but it is maximized at four lags in the case of non-exporting firms. Finally, we uncover that economic factors have lagged effect that varies with respect to firm trading nature, signifying the role of the trading effect.

Keywords:

Lagged effect, economic exposure, Pakistani stock market,and firm trading effect.

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