The Macroeconomic Determinants of Stock Price Volatility in Pakistan: An Empirical Investigation

Abstract

Stock price volatility has been a source of prime interest in the capital markets because stock markets are crucial in any economy in terms of their implications. This study empirically investigates the factors influencing stock price volatility in Pakistan using monthly data (January 2015 to December 2021). This study uses the three-month moving standard deviation method to compute stock price volatility. The ARDL technique is used to analyze the factors of stock price volatility. In the long run, a significant and positive relationship exists between the exchange rate, supply of money, interest rate, and stock price volatility. Whereas, the industrial production index and money supply have a statistically significant and positive association with stock price volatility in the short run. However, the consumer price index, exchange rate, and rate of interest exhibit a significant and inverse association with stock price volatility in the short run. The diagnostic check of estimated coefficients is also done to ensure the best, most linear, and unbiased estimates. To check the sensitivity of the estimated coefficients concerning significance, sign, and magnitude the volatility of the stock prices is also calculated using the ARCH model. The empirical findings on average are moderately robust. It is strongly recommended that the central bank and government develop monetary and fiscal policies focused on exchange rate stability and monetary expansion stability.