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Time-Varying Impacts of Macroeconomic Variables on Stock Market Returns and Volatility : Evidence from Pakistan

Author

Listed:
  • Abdul RASHID

    (International Institute of Islamic Economics (IIIE), International Islamic University (IIU), Islamabad.)

  • Aamir JAVED

    (Department of Business Administration, Universita Degli Studi G.d’Annuzio, Chieti-Pescara, Italy.)

  • Zainab JEHAN

    (Department of Economics, Fatima Jinnah Women University, Rawalpindi, Pakistan.)

  • Uzma IQBAL

    (Pakistan Institute of Development Economics (PIDE), Islamabad, Pakistan.)

Abstract

This paper investigates the time-varying return and volatility spillover impact of exchange rates, interest rates, consumer prices, and industrial production on stock market returns in Pakistan by using monthly data covering the time period 2000-2018. For this purpose, we first estimate GARCH models to obtain the conditional variance. Next, we employ the Gaussian state-space model, which allows the coefficients to vary over time, to estimate the time-varying return and volatility spillover impacts of the underlying variables on stock market returns. We find a significant time-varying impact of inflation rate, interest rates, and exchange rates on stock returns, suggesting that the impacts of these variables on stock returns change over time. The findings also confirm the time-varying volatility impacts, indicating that the intensity and magnitude of the transmission of macroeconomic volatility to stock returns’ volatility significantly changes over time. This empirical analysis is helpful for investors and firm managers to design and implement more effective hedging strategies to minimize interest rate, consumer price, and exchange rate risks.

Suggested Citation

  • Abdul RASHID & Aamir JAVED & Zainab JEHAN & Uzma IQBAL, 2022. "Time-Varying Impacts of Macroeconomic Variables on Stock Market Returns and Volatility : Evidence from Pakistan," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 144-166, October.
    • Handle: RePEc:rjr:romjef:v::y:2022:i:3:p:144-166
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    References listed on IDEAS

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    More about this item

    Keywords

    returns and volatility; time-varying; interest rate; exchange rate; IPI; CPI; stock prices; GARCH model; state-space model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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