Abstract
This paper empirically examined the co-integration and direction of causality amongst micro-economic factors and stock returns for Pakistani listed firms over the period from 2006 to 2017. In total 100 firms were shortlisted across the sectors on the basis of market capitalisation. The selected micro-economic variables are returns on equity, earnings per share, debt to equity ratio, price to book ratio, price to earning ratio and net profit margin. We employed a unit root test, co-integration test, VECM and Granger causality test to inspect the co-integration and causal direction amongst micro-economic factors and stock returns. Evidence from study revealed statistically positive short-run and long-run relation of stock return with net profit margin, price to earnings ratio, earnings per share, returns on equity, and negative relation with debt to equity ratio. The VECM Granger causality test result reports no causal relationship of EPS and ROE with stock returns. Unidirectional causality was reported from NPM, PER and DER towards stock returns. Similarly, bi-directional causality is reported amongst PBR and stock returns. Thus it is concluded from the findings that investors can make substantial gains by using the trend of firm microeconomic factors to for see the stock returns trend rejecting the very notion of market efficiency.

Hina Qayum, Dr. Muhammad Ibrahim Khan, Dr. Burhan Ali Shah. (2018) Co-integration and Causality amongst Micro-economic Factors and Stock Returns: An Empirical Analysis from Pakistan Stock Exchange, Sir Syed Journal of Education & Social Research (SJESR), Volume-01, Issue-1.
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