Impact of Macroeconomic Factors on Automobiles Stocks Returns in PSX

The study examined the dynamic relationship between Automobile Stock Returns of Pakistan and stock prices of the Automobiles sector, SPI (Sensitive Price Indicator), Interest Rate, Exchange Rate using Vector Autoregression (VAR) econometric model. The results based on weekly data from January 2014 to 2018 time period. Augmented Dickey-Fuller and Phillips–Perron tests are performed to check the random walk behavior in the different data series. The results of impulse response have shown Stock price shocks impacts on Stocks return is positive, Exchange rate shocks impacts on Stocks return is negative, SPI shocks impacts on Stocks return is negative and Interest rate shocks impacts on Stocks return is positive in short-run but negative for the long run. The results of the variance decomposition test exposed that stock return impulse causes variation in other variables as much as 15.76% in stock price, 86.22% in the Exchange rate, and 10.68% in the Interest rate and 15.92% in SPI. Granger causality test indicated stock prices time series is useful in forecasting stock return, stock prices time series is useful in forecasting interest rate and stocks return time series is useful in forecasting interest rate, other variables in the model are exogenous variables which cant not be used to forecasting other variables in the system they don’t have a causal relationship between them.