The Relationship between Stock Market Volatility and Macroeconomic Volatility: Evidence from Pakistan
34 Pages Posted: 27 Jul 2011
Date Written: July 18, 2011
This study is based on examining the relationship between stock exchange market volatility and macroeconomic variables volatility with respect to Pakistan. To measure this time series relationship for Pakistan Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) and lag-augmented VAR (LA-VAR) models were used. It was found that there is a positive relationship of CPI and FDI with stock market; however ER and TBR are inversely related to sock market volatility. On the other hand we found strong evidence that there is a bilateral relationship of FDI and ER with stock prices, while a unidirectional relationship found between TBR and stock market prices, with the direction from stock prices to treasury bills interest rate. However a significant causal relationship not found between CPI and stock prices. The analysis of this study reveals that the stock market of Pakistan is relatively less efficient as compared to U.S and other developed economies of the world.
Keywords: Pakistan, Macroeconomic volatility, Stock market volatility, EGARCH, LA-VAR
JEL Classification: F31, F41
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