Interplay Between Macroeconomic Factors and Equity Premium: Evidence Pakistan Stock Exchange

This paper examine the impact of macroeconomic factors on firm level equity premium. Following the concept of macro-based risk factor model, we consider macroeconomic variable set of equity premium determinant. The macroeconomic variables include interest rate, money supply, industrial production, inflation and foreign direct investment. The macroeconomic variables are not in control of the firm's management. These are the external factors which affect the company as well as the overall market returns. The Macro-based Multifactor Model is estimated for the whole sample. It is found that the market premium and the selected five macroeconomic factors significantly affect the firm level equity premium of non-financial firms. Increase in market premium, money supply, foreign direct investment and industrial production positively affect the firm level equity premium while increase in interest rate and inflation negatively affects the firm level equity premium. These findings are beneficial for the common shareholders, institutional investors and policy makers to find more specific insight about the relationship between macroeconomic variables and equity premium of non-financial sectors