Impact of Interest Rate and Exchange Rate on Stock Returns
Author: Muneeb Ahmad, China
Abstract: Stock Market is the best indicator of any country’s growth. If stock market of any country perform better it means, the economy of that country is growing. At the same time Interest Rate is the biggest enemy of any country’s economy. Any economy with the higher interest rate faces the problem of devaluation in their currency which means increase in the exchange rate. So in this way interest rate and exchange rate becomes very important factor for any economy. In this project, I want to study how stock market reacts to interest rate movements and exchange rate movements. To examine this reaction, I have used the data of Interest rate, exchange rate and Stock returns for the time span of 1998 to 2009 in Pakistani Perspective. By applying the multiple Regressions, my findings indicate that interest rate and exchange rate have significant impact on stock returns with the alpha 10%. Interest rate is negatively correlated with the stock returns while exchange rate is positively correlated with the stock returns.