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

This study explores the relationship between stock returns volatility and macroeconomic variables in Pakistan. This study has used monthly observations covering the period from 2001-01 to 2011-06. First, Exponential Generalized Autoregressive Conditional Hetroskedasticity (2, 2) model is used to analyze the volatility in stock returns. Graph of news impact curve shows that higher risk is contributed toward negative shocks in stock market as compared to positive shocks of the same magnitude. In the next step the researcher has explored the macroeconomic determinants of stock market volatility through ARDL approach because variables are I (0) in addition to I (1). Results from ARDL approach revealed that macroeconomic variables are responsible factors in explaining stock market volatility. Inflation, real exchange rate and oil prices are found encouraging factors of stock market volatility while Industrial sector output and real supply of money affects the volatility negatively.