Determinants of Stock Market Returns: Analyzing the Impact of GDP Growth, Interest Rates, and Foreign Direct Investment

Abstract

This study explores the linkage between macroeconomic variables and stock market returns in the setting of the Pakistan Stock Exchange (PSX). The dependent variable, stock market return, is presented as the growth rate in the annual average stock market index over a 10-year period from 2012 to 2022. The independent variables are the growth rate of Gross Domestic Product (GDP), interest rate and foreign direct investment (FDI) inflows. besides, other macroeconomic indicators like inflation, exchange rate, and population are taken into account. The data for this study is gathered from the PSX, in order to determine how changes in macroeconomic factors impact the stock market performance in Pakistan. The GDP growth rate is a measure of the annual percent change in a country’s GDP at market prices, adjusted for constant local currency values. Interest rates data shows the rates which are offered by commercial banks for different kinds of deposits. Foreign direct investment is generally measured as net inflow of investment into the country. Regressions are employed in the study to investigate how these macroeconomic variables are associated with stock market returns. The findings show that all the variables considered have significant influence on stock market returns in the Pakistani context.