The Relationship between Stock Market Volatility and Macroeconomic Volatility: Evidence from Pakistan

34 Pages Posted: 27 Jul 2011

See all articles by Rizwan Mushtaq

Rizwan Mushtaq

Université Paris I Panthéon-Sorbonne

Dr. Muhammad Zia ur Rehman

National Textile University, Faisalabad; International Islamic University, Islamabad

Syed Zulfiqar Ali Shah

International Islamic University; Mohammad Ali Jinnah University (MAJU)

Ghulam Murtaza

Air University - Islamabad

Date Written: July 18, 2011

Abstract

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

Suggested Citation

Mushtaq, Rizwan and Zia ur Rehman, Muhammad and Ali Shah, Syed Zulfiqar and Murtaza, Ghulam, The Relationship between Stock Market Volatility and Macroeconomic Volatility: Evidence from Pakistan (July 18, 2011). Available at SSRN: https://ssrn.com/abstract=1888073 or http://dx.doi.org/10.2139/ssrn.1888073

Rizwan Mushtaq (Contact Author)

Université Paris I Panthéon-Sorbonne ( email )

12 place du Panthéon
Paris, 75005
France

Muhammad Zia ur Rehman

National Textile University, Faisalabad ( email )

Sheikhupura Road, Faisalabad
Faisalabad, Punjab 38000
Pakistan

International Islamic University, Islamabad ( email )

Islamabad, 44000
Pakistan

Syed Zulfiqar Ali Shah

International Islamic University ( email )

PO Box 1243
Sector H-10
Islamabad, Kpk 44000
Pakistan

Mohammad Ali Jinnah University (MAJU) ( email )

74 E
Blue Area, Jinnah Avenue
Islamabad, Punjab 46000
Pakistan

Ghulam Murtaza

Air University - Islamabad ( email )

Service Road E-9
Islamabad, 44000
Pakistan

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