An Empirical Analysis of Causal Relationship between Stock Prices and Real Sector of the Pakistani Economy

This paper determines the causal relationship between stock prices and the macroeconomic variables representing the real sector of the Pakistani economy. In order to substantiate the purpose annual data has been acquired from the websites of State Bank of Pakistan and Federal Bureau of Statistics, from the period of 1979 to 2013. Further to get the results Unit Root, Cointegration, Error correction model has been applied. Which indicate the presence of long term relation between stock prices and macroeconomic variables including gross domestic product (GDP), Consumption and Investment. Moreover, the result shows the existence of one-way causation between macroeconomic variables such as GDP, real consumption expenditure, and real investment expenditure. This one-way causation lead to the conclusion that the stock market of Pakistan is not developed to that extinct where it could influence GDP, real consumption expenditure, and real investment expenditure. Therefore, it is finally concluded that the stock market of Pakistan is not a leading indicator of any activity of economy.