Impact of Macroeconomic Indicators on Oil and Gas stock Market: A case of Pakistan Background:

The macroeconomic factors are mostly influence some other economic activities with it. Stable economic factors are most beneficial for decision makers, policy makers and managers. Managers are willing to have projected and forecasted indicators, but in fact it fluctuates with the passage of time because of unpredictable future events. Managers usually keep an eagle eye on macroeconomic indicators for taking decision in stock market. Both the interest rate and inflation rate has an adverse effect upon the stock market, investors take advantage of the depreciation in the domestic currency i.e. exchange rate losses (Kyereboah-Coleman & Agyire-Tettey, 2008). Some macroeconomic factors do not affect all the companies, industries, businesses and markets equally, because some react more sensitively while some react less sensitively. Different market portfolios react differently to the change in macroeconomic variables (Rjoub, et al., 2009).A regulatory authority changes interest rate to control inflation rate which causes the disturbances in investments. Higher interest rate leads investors to deposit money in banks which directly affect the investment in the stock market and indirectly increases the cost of capital which leads to lower the price earnings ratios. The stock prices and interest rate have a negative relationship, increase in interest rate causes decrease in price earnings ratio (Amoako-Adu & Smith, 2002). Usually the central bank fluctuate interest rate for controlling the money supply, increment in interest rate lead to encourage investors to deposit money in commercial banks cause reduction in money supply while decrement in interest rate encourages the commercial banks which leads to take loan from the central bank which causes increase in money supply. A short term and long

term causal relationship exist between the macroeconomic variables and stock market (Wickremasinghe, 2011)

Introduction:
Pakistan is one of the countries having very unpredicted macroeconomic indicators. Pakistan has an unstable economy because of risks in the macroeconomic factors such as interest rate, inflation rate, GDP growth, money supply and Industrial production. According to the world Banks report the last reported interest rate was 14.04 in 2010, 14.54 in 2009 and 12.94 in 2008. The average interest rate is recorded 12.78% from the time period 1992 to 2010. In this duration the highest interest rate is found 20% in Oct 1996 and the lowest recorded as 7.5% in Nov, 2002. The inflation rate in July 2012 was recorded 9.6%, and an average of 10.6% was recorded from 2003 to 2012 with a highest rate of 25.3% in August 2008 and a lowest rate 1.4 in July 2003. Pakistan GDP growth rate is also unstable like the interest rate and inflation rate. Because of the unstable economy and the lack of information the foreigner investors are not willing to invest in it. Managers, policy makers and decision makers mostly take decision wrongly because of the lack of information. The market shows some kind of speculative characteristics. And most of investors take advantage of it while some are suffered from the market and make high losses. Pakistan is enriched with the Oil and Gas and its 79% Energy consumption included Petroleum and Gas. Oil and Gas is one the growing industry on Karachi Stock Market and most in investors like to invest in Oil and Gas stock market.

Significance:
Most of Stock markets are influenced by fluctuations in macroeconomic variables but not the all. Previous researches concluded that there is a significant relationship of these two variables but its magnitudes and direction depend upon company to company market to market and industry to industry. One more research showed that the Japanese stock prices do not affected by its domestic interest rate but influenced by the American stock prices. Oil and Gas is one of the most important industry, there is no research available on the relationship between the macroeconomic variables and the Oil and Gas stock market, so this research is about to analyze the relationship between these two variables.

Objective:
The main objective of the research paper is to provide the information for both the investors i.e. domestic and foreigner, to avoid market speculation and to aid the managers, decision makers and policy makers in their decision making.

Literature Review:
(Gahlot & Datta, 2012) analyzed the impact of future trading on the volatility and performance of stock markets of China, India, Brazil and Russia using the GARCH statistical model. The check the market efficiency the study followed the ACF test and Run test. Furthermore the study used GARCH M model to analyze the impact on volatility. The study resulted that during the high volatility period the market doesnt generate higher returns, by introducing future trading Russian market led to efficient market and volatility in Indian stock market led to decrement. (Chen, et al., 2012) analyzed the relationship of stock market and bonk market on the bases of the influence of information shocks. The information was further decomposed of two components, i.e. public information and private information. The response of information was measured by using SVAR and BEKK model. Result showed that public information affect the return for short term while private information affect the returns for long term and volume as well. (Floros, 2011) examined the impact of weather i.e. temperature on the stock returns in Portugal. The data of stock prices and weather was collected from the Lisbon Stock market and Lisbon Capital for the study considering the time period of 1995 to 2007. The paper followed TGARCH (1, 1) and AR (1) statistical models regarding few assumptions such as Student-t, Normal and GED. A negative relation found between temperature and stock returns, positive returns were found in Januarys in first fortnight returns were comparatively high. Because of investors aggressiveness in lower temperature higher stock returns were found. (Raj & Kumari, 2006) investigated the seasonal impact in Indian Stock market, such as the impact of weekend, day of the week, week day, effect of January and April. Market efficiency of

Indian stock market was tested by applying a variety of statistical models and hypothesis. In the case of India the positive January effects and a negative Monday effects are not found, but a positive Monday and negative Tuesday effects are found i.e. Stock returns were found higher on Monday and lower on Tuesday. (Al-Rjoub & Azzam, 2012) investigated the behavior of stock returns during financial crises in emerging markets for the duration of 1992 to 2009 across the Jordan. The author determined the behavior of stock returns for the global, regional and local events. The study was analyzed by using GARCH-M model to obtain the changes in variance. The frequency of three different kinds of data was analyzed for analysis i.e. daily, weekly and monthly. The stock returns for all the segments are found negatively related with the financial crises in which banking sector was found the most affected one. (Drner, 2005) analyzed the influence of financial announcement upon the stock prices. Data is obtained from a real estate firm in Sweden of the time period from 1991 to 1996. Press release of the firm i.e. quarterly reports and articles which were published in magazines was used as the data source. Annual reports were excluded because at that time the information of annual reports are responded to the stock prices. The study found a positive relation between the stock prices and information of occupancy rates, capitalization rates, net asset value and cash flow. With disclosure of such information the stock prices increases accordingly. (Hussainey & Ngoc, 2009) investigated the relationship of macroeconomic factors i.e. industrial production and interest rate specifically with stock markets across the Vietnams stock market. The study also explored that how Vietnamese stock markets are affected with the American macroeconomic indicators using the monthly time series of time period from January 2001 to

April 2008. The study revealed that there is a strong association among money market, industrial production and stock markets in Vietnam. Study further explained that there is a significant influence of US macroeconomic indicators upon Vietnams stock market. (Kyereboah-Coleman & Agyire-Tettey, 2008) examined the effect of macroeconomic indicators upon the performance of Ghana Stock market using the cointegration and error correlation statistical models. The study analyzed the quarterly data of the time period from 1991 to 2005. Study revealed that the inflation rate has a negative relation with the stock market performance and loss in exchange i.e. depreciation in domestic currency is beneficial for the investors who are invested in stock market.

Data and Methodology: Data:

Collecting the right data of the right time period is one of the most important activities in conducting any kind of study. As the study has three independent variables in the study i.e. interest rate, inflation rate and GDP growth rate. For interest rate the study can be analyzed with daily, weekly, monthly, yearly KIBOR (Karachi Inter Banking Offered Rate) rates with the different tenures (daily, weekly, monthly and of six moth), lending interest rate and benchmark (Offered by regulatory authority)as a proxy of interest rate, but for inflation and GDP growth rate study can take monthly and yearly rates. According to (Hussainey & Ngoc, 2009) the study will analyze the relationship with Benchmark interest rate. One dependent variable stock price can also be taken as daily, weekly and monthly. Because there are few companies on Karachi stock exchange which has stock prices higher than Rs. 100 so the stock prices will be converted into logarithmic prices and then the data will be analyzed according to (Kyereboah-Coleman & Agyire-Tettey, 2008). Looking at the suitability and matching of the dependent and independent variables the study will take the monthly time series of the time period from July 2002 to July 2012.

Data Source:
Reliable source is very important for the data to analyze and conclude significant results. The study is about the check the impact of macroeconomic indicators on Oil and Gas stock prices. There are 26 listed companies on Karachi Stock Exchange in Oil and Gas industry. The Data will be taken for the study from Karachi Stock Exchange which has a high degree of reliability and comforts and openly available in the market.

Sampling:
Most of the times when population becomes very high, then sampling technique could be followed for convenience. There are 26 listed companies on Karachi Stock exchange in Oil and Gas industry consisting of from high reputation to low reputation companies. But only a sample of ten companies from the population will be included which is the 38.5% of the whole population. This sample technique will be consisted of two steps, in first step the high reputation and low reputation companies will be grouped in two groups. The study will take a sample of five companies from each group randomly to avoid the reputational biasness.

Methodology:
For the reliable and significant results it is necessary to follow a suitable statistical model. As the study is about to determine the impact of macroeconomic indicators on stock market, so it will follow the Multiple Linear Regression (Used for determining the impact of more than one independent variables upon dependent variable). Before applying this model the Data will be analyzed with auto-correlation statistical tool to determine the association of both the independent and dependent variables. Mathematically Multiple Linear Regression is expressed as follow.

y is expressed as the log prices (dependent variable) of stock market, i shows the cross section, t represents time series, is expressed as intercept, rate, represents the coefficient/slope of inflation rate, as coefficient / slope of interest

represents coefficient/slope of GDP as inflation rate

growth rate,

is expressed as interest rate (independent variable),

(independent variable), in the model.

as GDP growth rate (independent variable) and represents error term

Analyzing the data with the Multiple Linear Regression, the data should to be Homoskedastic. To check the heteroskedasticity and Homoskedasticity of the data, Breush Pagan test will be followed. Homoskedastic data will be analyzed with one of the three types of Panel Regression i.e. Pooled effect model, random effect model or fixed effect model. If the data found to be heteroskedastic then it will be analyzed with heteroskedastic-correlation model.

Hypothesis:
: The macroeconomic variables have no significant impact on Oil and Gas stock market. : The macroeconomic variables have a significant impact on Oil and Gas stock market.

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