Impact of Interest Rates on Stock Index: Case of Pakistan Stock Exchange

Abstract

The purpose of the paper was an attempt to trigger the connection between interest rates (Pakistan inter-bank offer rate) of different maturities and the stock index. PSE-100 index of Pakistan was selected, and its monthly returns were tested with Pakistan inter-bank offer rate rates as the independent variable. For the proposed connection, the model was developed, and certain statistical tests were applied. Monthly stock prices of PSE-100 and Pakistan inter-bank offer rates of 5 different maturities were taken. Descriptive and correlation regression analysis was used to explain the relationship that was significant but inverse. The stock market in Pakistan is highly influenced by political situations prevailing in the country. The stock market is considered an interpreter of the economy. Other than interest rates influence the stock market, one basic factor was selected for study purpose, and conclusions were drawn. This study would help demonstrate the investors’ investment decisions who invest their resources in the stock market by borrowing at a prescribed rate.