EXPLORING THE NEXUS BETWEEN MACROECONOMIC VARIABLES AND STOCK MARKET PERFORMANCE IN PAKISTAN: EVIDENCE FROM ARDL BOUNDS TESTING

Abstract

Stock market is the most important economic indicator through which the stability of the country is determined since it enables and ensures long return to economy. The good performance of stock market organize the investors move the investment to saving that leads to increase the development of the country. This study examines the dynamic relationship between key macroeconomic variables and stock market returns in Pakistan from 1990 to 2025. The Autoregressive Distributed Lag (ARDL) model is employed to investigate the impact of inflation, exchange rate, money supply, GDP, balance of payments, and interest rate on stock market performance. Our findings indicate that in the short run, inflation and GDP have a negative relationship with stock market returns, while exchange rate, money supply, balance of payments, and interest rate have a positive relationship. In the long run, inflation, money supply, balance of payments, GDP, and interest rate have a positive impact on stock market returns, except for exchange rate. The Error Correction Term (ECT) reveals that the model converges to equilibrium at a rate of 58%, with a goodness of fit of 90%. The model is stable, with no autocorrelation and heteroscedasticity. Our results suggest that policymakers should maintain a constructive monetary policy, controlling inflation and stabilizing interest rates to promote stock market growth.