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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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