This academic research examines the determinants of conditional volatility of fifty stock returns and KSE 100 index for the time period of August 1998 to December 2008 and the impact of macro-economic volatility on stock volatility. The macro-economic variables included in the analysis are market return, industrial production, interbank call money rate, term structure of interest rate, money supply, exchange rate and inflation rate. In order to specify the relationship of ex-ante economic factors with stock returns, the Rational Valuation Formula (RVF) is used, which sets the current price as a function of all expected dividends and expectation of discount rate. The monthly data is used because the economic variables used in the study are not available on higher frequency than month. The results indicate that most of the stocks have positive and significant intercept term showing that homoskedastic part of the volatility is significant. The results of lag dependent variable are significant indicating that the conditional volatility of stock returns responds dynamically to its own past trend. This leads to general conclusion that the stock prices in Pakistan are influenced by financial and economic indicators included in the study. This also indicates in the long run that the underlying activities depend on the economic indicators. The increased variation in money supply and inflation make stock return more volatile and the unexpected change in call money rate and term structure of interest rate adversely affects the stock return.
Financial analysts’ strategic minds always cater to financial and economic indicators in assessing the future prospects of the stock market. The stock returns in addition to economic indicators in the f...
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...and macro-economic volatility by employing Zelner’s iterative procedure based on Henry general to specific modeling strategy.
1.2) Objective of the Study
The main objective of the study is to demonstrate the impact of macro-economic volatility on stock volatility in Pakistani market for the time period of August 1998 to December 2008. The conditional volatilities of the macro-economic indicators and 50 stock returns are examined through the application of Zelner’s iterative procedure based on Henry general to specific modeling strategy.
1.3) Organization of the Study
The plan of the study is as follows. Chapter two provides literature review of previous empirical work, Chapter three discusses the data and methodology, the data analysis and interpretation of empirical results is presented in chapter four and chapter five explains the summary and conclusion.