The Impact Of Macroeconomic Volatility On Stock Return Volatility: Evidence From Pakistani Stock Market
This thesis examines whether macroeconomic disturbance that is volatility of macroeconomic variables can affect different sectors of stock market volatility by applying Random Effect Model on panel data over 8 sectors of Pakistan Stock Exchange. The panel estimation is used because there was both time effect and crosssectional effect. The time frame is used in monthly data from January 2004 to December 2014. The macro-economic variables comprised in the analysis are Industrial Production Index, Interest Rate, Gold Prices, Crude Oil Prices, Money Supply M2, Exchange Rate and CPI. To account for the effects volatility of fundamentals, ARCH/GARCH model is employed to evaluate the volatility of stock returns and macroeconomic variables. The result of random effect model suggests existence of volatility persistence. The industrial production volatility has surprisingly negative effect on stock market volatility and the volatility of exchange rate captures the external sector volatility and has positive effect on the stock return volatility. Gold prices has negative whereas crude oil price volatility has positive effect on share market return volatility. The increased variation in money supply and inflation make stock returns more volatile in opposite way. This leads to conclusion that the stock prices variations in Pakistan are influenced by financial and economic variables’ uncertainty included in the study but only the two variables. Subsequently stockholders, consultants and policy makers must take into attention the economic volatility of above two variables like crude oil prices and interest rate in their analysis of risk management of portfolio investment. Supervisor:- Dr. Attiya Yasmin Javid
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