An Analysis of the Stock Return and Exchange Rate Variation on Market Return of Pharmaceutical Industry in Pakistan

Themain purpose of this paper is to investigate the exchange rate exposure of pharmaceutical industry of Pakistan in long run and short term. Quarterly time series data for last 37 quarters from 2003Q1 to 2012Q1have been used. Unit root test, co-integration test and ECM have been applied to investigatethe stationarity and long run and short term exposure of the industry. Results revealed that all variables are stationary at level with intercept only. Co-integration results showthat there is long run relationship between stock returns, exchange rate and market return index. Error Correction Mechanism results shows that that there is negative short term significant relationship between stock returns of pharmaceutical multinationals of Pakistan and exchange rate dollar currencyin short run. Likewise stock returns have positive short term and significant impact with market return index. The equilibrium adjustment term show that all the disequilibrium in short term will adjusted in current period as the coefficient of error term is 1 and statistically significant. Keeping in view, the findings of this study suggest that extensive financial hedging is necessary to moderate the exchange rate exposure.