The Impact of Exchange Rate Volatility on Stock Index: Evidence from Pakistan Stock Exchange (PSX)

The exchange rate Volatility is considered to be the most important and persuasive variable that affects the performance of stock index. The stock market plays an imperative role in the growth and development of a country. This study mainly aimed at to empirically examines the Impact of Exchange Rate Volatility on Pakistan Stock Index (PSX). The correlational research design is used in order to demonstrate cause and effect relationship between the variable under studied. The nature of this study was explanatory. Macro-economies variables have the problem of stationary, autocorrelation and heteroskedasticity, diagnostic test is paramount important while applying regression in order to reach meaningful results so it was necessary to fulfill the assumptions of regression. Augmented Dickey-Fuller test statistic is employed. Two financial variables have been studied where Exchange rate Volatility is used as an independent variable whereas stock index is worked out as dependent variable. Twelve years monthly data from secondary sources, starts from 31st of January, 2003- 31st December, 2015 have analyzed. The study results found that there is positive and statistically significant relationship between Exchange Rate Volatility on Stock Index of Pakistan. Based upon key findings, this study particularly postulates that countries like Pakistan which has an emerging economy the macroeconomics variables i.e. exchange rate Volatility and stock index of Pakistan are associated, thus the public who desire to invest must utilize the information of important macro-economic variable in particular exchange rates volatility in order to predict the behaviour of stock market index.