Nexus Between Monetary Policy, Exchange Rate Volatility, Inflation and Stock Market

The objective of this study is to examine the relationship between broad money, discount rate, inflation, exchange rate, KSE 100 index, and market capitalization to test the validity of financial theories such as Sharpes' theory of market equilibrium and Fama' s theory of efficient markets using time series data spanning from 1990 to 2020. Market capitalization was dependent variable, while all others were independent variables. Various econometric techniques, such as correlation matrix and Multiple Regression analysis were employed to determine relationship between variables. The findings reveal that broad money, KSE 100 index and discount rate have positive effect on market capitalization, while inflation and real exchange rate have negative impact on it. The performance of stock index is significantly affected by inflation and exchange rate volatility, and, therefore the policymakers should target these two variables to stabilize the stock market.