THE IMPACT OF MACROECONOMIC VOLATILITY ON STOCK RETURN VOLATILITY: EVIDENCE FROM PAKISTAN STOCK MARKET

This study examines the impact of macro-economic volatility on stock return volatility for fifty stocks listed at the Karachi Stock Exchange using monthly data from July 1998 to June 2014. The macro-economic variables included in the analysis are market return, industrial production, inter-bank call money rate, term structure of interest rate, money supply, exchange rate and the inflation rate. The result of significant autoregressive process suggests existence of volatility persistence. The industrial production has a negative effect on stock market volatility and the volatility of exchange rate captures the external sector volatility and has a positive effect on stock return volatility. The increased variation in money supply and inflation make stock returns more volatile and an unexpected change in call money rate and the term structure of interest rate has the opposite effect on stock returns volatility. This leads to the conclusion that stock prices fluctuations in Pakistan are influenced by financial and economic variables’ uncertainty. Therefore, investors, authorities and policy makers are needed to take into account the