BRIEF HISTORY OF KARACHI STOCK EXCHANGE:
In 1947, after the independence from British rule in newly born country, Pakistan, Karachi Stock Exchange (KSE) was founded in Karachi in order to provide hub for trading activities in financial capital of Pakistan (Bloomberg Business Week, 2011). It got registration after few years of its establishment and became Karachi Stock Exchange Limited. In 1950s, there were only 5 listed companies and 90 members in this exchange. But after that it has experienced remarkable progress and reached at the level of 651 listed companies and 200 members in first decade of 21st century (Karachi Stock Exchange, 2011). KSE started its computerized operation in 1997 by using KATS (Karachi Automated Trading System). KSE attracted local and foreign investment when in 2002 it was declared as one of the best performing markets in the world by an international magazine Business Week (Bloomberg Business Week, 2002). Due to huge business in KSE during this period demand for Trading Workstations increased. Hence these workstations were significantly increased and crossed the level of 1000 KATS workstations (Naqvi, 2011). In addition already installed KATS workstations upgraded and internet trading facility was also provided on these stations. In the last decade of 20thcentury Karachi Stock Exchange introduced KSE 50 Index but it could represent the stock market performance due to continuous growth. Hence a capital weighted KSE 100 Index was introduced in order to absorb contentious investment and to show clear stock market performance. Karachi Stock Exchange also introduced KSE All Share Index in 1995 and KSE 30 Index in 2006. Currently, it has the status of oldest exchange in Pakistan and successfully trading in these three world famous indices. Up to 2010, KSE has volume of US$ 12 billion and market Capitalization US$ 32.5 billion (Karachi Stock Exchange, 2011).
LITERATURE REVIEW:
The world economy is suffered due to fluctuation in oil prices (Luft 2006). There is a relationship between oil prices and the economic activities and relationship between both is negative. (Mehmet EryiÄŸit' 2009).Studies and Economists indicated that an oil price increase is the primary reason for inflation.(Energy Economics 2005).According to Perry Sadorsky's research published in 2000 he mentioned that there is also a relationship between oil prices, economic growth and inflation(Paresh et al 2009). According to "Danial" in his research paper published in 2009 Real economy also depended variable that is fluctuate with the oil prices & there is a negative relationship between both variable ( Danial ,2009).
The relationship between changes in oil prices and stock after analysis daily data from 1983 to 2006 it is stated that change in oil price also effect the economy & stock exchange of the US(Sridhar Gogineni, 2008).Oil prices not only effect the stock exchange of Pakistan and Indian stock exchange & economy it also effect the stock exchange & economy of the super power of the world US & Russia and all countries(Stanislav 2006).There is strong evidence that changes in oil prices forecast stock returns. This predictability is economically significant, robust over time and cannot be explained by calendar anomalies or well known economic variables that predict stock returns (Gerben Driesprong et al 2004) Oil prices relationship with stock prices and exchange rates in the long-run. First, this study identifies three major oil producing countries and three major oil consuming countries. (Samuel. 2010).
Increase in oil prices affect the stock market and also affect their expected earning it has negative impact on stock prices before the negatively affect its return for example industrial production as well as economic growth (Achraf, 2004). Increase in oil prices increases the stock price. Because oil is important energy resource of production if it's prices increase it increase the production cost and through this stock prices will also increase (Norasibah et al.2009). Increase in oil prices impact on stock exchange but through indirect manner and this is monetary policy that effect on stock exchange. (Bjornland 2008)
Increase in oil prices has adverse effect on developing countries than the developed countries because they are more dependent on the return on import oil to circulate it's real economy (Afia, 2010). There are three key features in any account over low prices elasticity of demand, the strong growth from middle & newly industrialized economies from Middle East and other newly industrialize economy, high growth of oil demand from china and also global production increases.(James et al, 2008). China & India's oil demand is more and both combined together will represent 42% of the global increase in oil demand between 2005 and 2030. China will make a bigger player in future because China has large reserve of foreign country. China and India growth rates are 3.6% & 3.9 % respectively (Syed Abdul et al 2010).
Macroeconomic variable such as real GDP, growth rates, inflation, employment and exchange rate also effect by the change in oil prices on international level (Hamilton, 1983; Gisser and Goodwin, 1986; Mork, 1989; Hooker, 1996; Davis and Haltiwanger, 2001; Hamilton and Herrera, 2002; Lee and Ni, 2002; Hooker, 2002). Oil price also effect on economic activities in a country and when economic activities in a country will effect then it also effect on employment condition of that country and in industrilized countries chang in employment condition have a significant impact on industry.(Hamilton, 1983; Burbridge and Harrison, 1984; Gisser and Goodwin,1986; Mork, 1989; Ferderer, 1996)
Increase in oil prices in Pakistan is the result of increase in oil prices at international level and increase in oil prices in the international also negative effect on balance of payment and negative balance of payments result pressures on economy (Malik 2008).Pakistan is heavily dependent on its oil import to run its economic machinery, if oil prices increase it has negative impact on stock prices and also decrease the earning of companies either these are direct link with oil or not so through this way it immediate decreases the stock price.
(Noreen et al.2005)
Stock prices, oil prices and nominal exchange rates are co integrated, and oil prices have a positive impact on stock prices. This result is inconsistent with theoretical expectations. The growth of the stock market was accompanied by rising oil prices (Paresh et al 2009). Oil price movements are an important and interesting topic to study because increases in oil prices are often indicative of inflationary pressure in the economy which in turn could indicate the future of interest rates and investments of all types.( Perry Sadorsky 2000)
There is also a possibility that economy is independent variable and it effect the oil prices because oil is a major source of revenue in those country GCC (Gulf Cooperation Council) that's way economy is independent variable and they set oil prices according to their economic need or mutual commitment of GCC.
(El Hedi 2006 ).
Population is increasing day by day and now and the future time is of technology and increasing in population also result in increase in consumption of oil that's way if need of a country will increase then import of oil will be necessary for fulfillment of need and this will affect the stock exchange (Chu-Chia et al 2009).
There is a effect of nominal interest rates and inflation on stock prices.( Journal of Policy Modeling 24 (2002) 231-236).Interest rate also influences the investor and there is a negative relationship between investment and interest and there is a negative relationship between interest rate and present value of future dividend (decline in interest rates leads to an increase in the present value of future dividends) (Hashemzadeh &Taylor, 1988).
Malkiel (1982). Interest rate is one of the most important factor that determine the stock prices (Modigliani and Cohn 1979).Inflation insecurity leads to higher risks linked with the investment and production processes of the corporate sector(the Friedman effect, Friedman, 1977).Investment and economic growth also depend on inflation (Clark, 1993).The result of inflation is lower stability of prices and the result of lower stability of prices is there are low investment and production (Huizinga (1993), andZion, Spiegel, and Yagil (1993).
Many economic variables including gold prices and so many others have effect on the stock markets (Ratonpakorn and Sharma 2007). There is a negative relation between Gold prices and stock/bond markets Moore (1990)
VARIABLES
INDEPENDENT VARIABLE
OIL PRICES:
International oil prices are consider as independent variable as per other authors been studied for this research international oil prices
Negative relationship between oil prices and international markets. (Afia Malik,2008).
Negative relationship between oil prices and international markets(Achraf Ghorbel, 2009).
Impact of oil prices on stock market is mix both Negative and positive. .
( Pei Cheng et al, 2010).
Japan and Use both have negative effect of oil prices on stock market(Donoso et al, 2009).
If shock in oil prices is positive then its impact on stock market is nagetive.( Basher et al, 2010).
CHINA Have week relations ship between stock market and oil prices.( Samuel Imarhiagbe, 2010).
STOCK MARKET PRICES:
In this study the dependent variable that is stock market prices have been taken, from Karachi stock Exchange Pakistan (KSE)
Framework:
International Oil Prices
Stock Prices
This model shows that stock market prices are dependent variable that is depending upon the independent variable that is international oil prices and inflation. With a slight change in the oil prices and inflation how much the stock prices are affected is shown from different tests.
HYPOTHESIS DEVELOPMENT:
On the basis of historical study that has been done in this paper about the oil prices and the stock market hypothesis is being developed that:
H01: There is a positive relationship between oil prices and the stock market prices.
H02: There is a positive relationship between Inflation and the stock market prices.
H1: There is a no relationship between oil prices and stock market prices.
H2: There is a no relationship between inflation and stock market prices.
