DefinePK

Research Objective

To empirically investigate the factors influencing stock price volatility in Pakistan using monthly data from January 2015 to December 2021, and to calculate stock price volatility using a moving standard deviation method.

Methodology

The study uses monthly data from January 2015 to December 2021 for the KSE-100 index in Pakistan. Stock price volatility is calculated using the three-month moving standard deviation method. The Autoregressive Distributed Lag (ARDL) technique is employed for analysis, including stationary tests (Augmented Dickey-Fuller), the ARDL bound test for cointegration, and diagnostic tests (Jarque-Bera, White Heteroskedasticity, Breusch-Godfrey Serial Correlation LM, Ramsey RESET, CUSUM, and CUSUM of squares). Robustness is checked using the ARCH model.

Methodology Flowchart

                        graph TD
    A["Data Collection Monthly, Jan 2015 - Dec 2021"] --> B["Calculate Stock Price Volatility"];
    B --> C["Stationarity Test"ADF""];
    C --> D["ARDL Bound Test for Cointegration"];
    D -- Cointegration Confirmed --> E["Estimate ARDL Model Long & Short Run"];
    E --> F["Conduct Diagnostic Tests"];
    F --> G["Perform Robustness Check ARCH Model"];
    G --> H["Analyze Results & Formulate Conclusions/Recommendations"];                    

Discussion

The study discusses the impact of macroeconomic variables on stock price volatility in Pakistan. It highlights that currency depreciation increases production costs, leading to uncertainty and investor reactions. Rising interest rates make borrowing more expensive for businesses, potentially reducing profits and leading investors to shift capital. Increased money supply can enhance market liquidity, leading to rapid stock price increases and uncertainty. The findings are discussed in relation to existing literature, noting both consistencies and variations. The robustness analysis indicates that findings for the consumer price index, interest rate, and exchange rate are moderately robust, while those for money supply and industrial production index are weakly robust.

Key Findings

In the long run, a significant and positive relationship exists between the exchange rate, money supply, and interest rate, and stock price volatility. The consumer price index and industrial production index show an insignificant relationship with stock price volatility in the long run. In the short run, the consumer price index shows a highly sensitive association. The exchange rate, money supply, and industrial production index have a significant and positive association with stock price volatility, while the interest rate has a significant and inverse relationship.

Conclusion

The study concludes that macroeconomic factors significantly influence stock price volatility in Pakistan. The exchange rate, interest rate, and money supply are identified as key drivers of volatility in both the long and short run, with varying directional impacts. The findings underscore the importance of stable macroeconomic policies for financial market stability.

Fact Check

1. Data Period: The study uses monthly data from January 2015 to December 2021. (Confirmed in text).
2. Methodology: The ARDL technique is used to analyze the factors of stock price volatility. (Confirmed in text).
3. Long-Run Relationship: The F-statistic of 6.529 in the bound test is greater than the upper bound value at the 95% confidence interval, confirming a long-run relationship. (Confirmed in text).

Mind Map