International Review of Business Research Papers
Vol.3 No.2 June 2007, Pp. 362 - 375
362
Stock Return Volatility in Emerging Equity Market (Kse): The Relative Effects of Country and Global Factors
Mohammad Faisal Rizwan* and Safi Ullah Khan**
This paper focuses on the role of macroeconomic variables and global factors on the volatility of the stock returns in an emerging market like Pakistan. The paper uses two multivariate models, multivariate EGARCH and Vector Auto Regressive (VAR) models to investigate the effect of exchange rate, interest rate, industrial production, money supply, Morgan Stanley Capital International (MSCI) World Index and 6-months LIBOR on stock prices in Pakistan’s equity market. The estimate shows that domestic macroeconomic variables have varying degrees of importance in explaining the relationship between stock returns and volatility in Karachi Stock Exchange. The empirical results also show that the two global factors, MSCI World Index and 6-months LIBOR, variables used in this paper explain the stock returns in KSE. An important conclusion drawn from the results is that macroeconomic variables exhibit asymmetric effects on returns volatility. Overall, the results show that Pakistan’s stock market is partially integrated as shown by the significant role of both country and global factors.
Field of Research: Finance
1. Introduction
Studies on the link between macroeconomic variables and stock returns are broadly divided into two groups based on the level of market integration. The first strand promotes the view that markets are generally integrated and, as a result, global risk factors are more important in explaining returns volatility than country factors. Most of the studies that emphasize the role of global risk factors have modeled returns as linear function of global risk factors (Ferson and Harvey, 1994; Dumas and Solnim,