Dynamic Links between Stock Market Returns and Industry Returns


  • Saqib Farid
  • Tahseen Mohsan Khan


Industry Returns, Market Returns, Information Diffusion, Causal Relationship, Structural Breaks, Out of Sample Performance Test.


Different from the prior studies that focus on the unidirectional relationship between industry returns and stock market in Pakistan, this study has examined the bi-directional causal relationship between industry returns and stock market returns by considering multiple structural breaks. Unlike the conventional approach, we investigated the industry leading, market leading, feedback and neutrality hypotheses in Pakistan Stock Exchange (PSX). The study employed robust time series techniques such as Granger causality test and Generalized Impulse Response Functions (GIRF) on monthly data of stock returns from January 2000 to December 2017. The results show that the information in industry returns could be effectively used to predict aggregate stock market returns. Additionally, our findings confirm industry leading hypothesis for Cement, Fertilizer, Oil and Gas and Power industries; market leading hypothesis for Chemical, Food and Insurance industries; feedback hypothesis for automobile sector and neutrality hypothesis for Banking, Pharma, Textile and Miscellaneous industries. The findings of the study can assist investors in formulating country- and industry-specific investment strategies in PSX.