Impact of institutional quality and macroeconomic variables on stock market in Pakistan
Main Article Content
Abstract
The ongoing debate surrounding the stochastic behavior of financial markets and their relationship with institutional quality and macroeconomic factors remains unresolved, with no consensus reached on the nature of the interplay between institutional quality, macroeconomic variables, and stock market volatility. The significance of comprehending volatility lies in its potential to disrupt the smooth operation of financial markets and negatively impact economic performance. This study aims to examine the potential contributions of institutional quality and macroeconomic variables to the dynamic patterns of stock market volatility. Notably, the introduction of institutional quality is a relatively novel concept in Pakistan, warranting further exploration. Consequently, this research delves into the influence of institutional quality on stock market volatility, considering factors such as control of corruption and political stability as well as macroeconomic variables like inflation, interest rates, and GDP. This quantitative study relies on secondary data and employs ARDL models spanning yearly data from Pakistan Stock Exchange (PSX) from 1996 to 2022. The empirical findings offer insightful information that can help shape institutional reforms, guide policy decisions, and affect investment choices that support the stock market's stability and expansion.
Downloads
Article Details
Section
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors who publish in this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licenced under a Creative Commons Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (see The Effect of Open Access).
How to Cite
References
Abbas, G., McMillan, D. G., & Wang, S. (2018). Conditional volatility nexus between stock markets and macroeconomic variables: Empirical evidence of G-7 countries. Journal of Economic Studies, 45(1), 77-99. https://doi.org/10.1108/JES-03-2017-0062
Abdul Rahman, E., & Saif, A. D. (2020). The impact of Political Stability and Absence of Violence/Terrorism on foreign direct investment flows in the Arab countries. North American Academic Research, 3(1), 1-20.
Adrian, T., & Rosenberg, J. (2008). Stock returns and volatility: Pricing the short‐run and long‐run components of market risk. The journal of Finance, 63(6), 2997-3030. https://doi.org/10.1111/j.1540-6261.2008.01419.x
Agyemang, O. S., Gatsi, J. G., & Ansong, A. (2018). Institutional structures and financial market development in Africa. Cogent Economics & Finance, 6(1), 1488342. https://doi.org/10.1080/23322039.2018.1488342
Ahmad, N. & Ramzan, M. (2016). Stock market volatility and macroeconomic factor volatility. International Journal of Research in Business Studies and Management, 3(7), 37-44.
Ahmed, K., Khan, B., & Ozturk, I. (2021). Dynamics between disaggregates of governance and stock market performance in selected South Asia countries. International Journal of Finance & Economics, 26(1), 802-813. https://doi.org/10.1002/ijfe.1821
Aijaz Syed, A. (2021). The asymmetric relationship between military expenditure, economic growth and industrial productivity: An empirical analysis of India, China and Pakistan via the NARDL approach. Revista Finanzas y Política Económica, 13(1), 77-97.
Ajaz, T., Nain, M. Z., Kamaiah, B., & Sharma, N. K. (2017). Stock prices, exchange rate and interest rate: evidence beyond symmetry. Journal of Financial Economic Policy, 9(1), 2-19.
Akbar, M. (2023). Effects of inflation uncertainty and exchange rate volatility on money demand in Pakistan: Bayesian econometric analysis. International Journal of Finance & Economics, 28(2), 1470-1487.
Ali, S., Waqar, S., & Haris, M. (2019). The Nexus between Political & Institutional Corruption Events with the Stock Market: A Study of Pakistan. Journal of Finance and Economics Research, 4(1), 59-71.
Beetsma, R., & Giuliodori, M. (2012). The changing macroeconomic response to stock market volatility shocks. Journal of Macroeconomics, 34(2), 281-293. https://doi.org/10.1016/j.jmacro.2012.02.008
Bhowmik, R., & Wang, S. (2020). Stock market volatility and return analysis: A systematic literature review. Entropy, 22(5), 522. https://doi.org/10.3390/e22050522
Boadi, I., & Amegbe, H. (2017). The link between quality of governance and stock market performance: International level evidence. European Journal of Government and Economics, 6(1), 78-101. https://doi.org/10.17979/ejge.2017.6.1.4324
Brogaard, J., Dai, L., Ngo, P. T., & Zhang, B. (2020). Global political uncertainty and asset prices. The Review of Financial Studies, 33(4), 1737-1780. https://doi.org/10.1093/rfs/hhz087
Chang, B. H., Ahmed, P., Ghumro, N., & Rehman, M. U. (2018). Are gold markets weak form efficient? Evidence from China, India and Russia. Sukkur IBA Journal of Management and Business, 5(1), 52-65. https://doi.org/10.30537/sijmb.v5i1.189
Chang, B. H., Meo, M. S., Syed, Q. R., & Abro, Z. (2019). Dynamic analysis of the relationship between stock prices and macroeconomic variables: An empirical study of Pakistan stock exchange. South Asian Journal of Business Studies, 8(3), 229-245. https://doi.org/10.1108/SAJBS-06-2018-0062
Clemens, E. S., & Cook, J. M. (1999). Politics and institutionalism: Explaining durability and change. Annual review of sociology, 25(1), 441-466. https://doi.org/10.1146/annurev.soc.25.1.441
Damiran, S., Dorjdagva, O., Sukhee, B., & Myagmarsuren, T. (2022). Macroeconomic determinants of stock market volatility: Evidence from post socialist countries. Journal of Eastern European and Central Asian Research (JEECAR), 9(4), 569-580. https://doi.org/10.15549/jeecar.v9i4.966
Dinh, T., Goutte, S., Nguyen, D. K., & Walther, T. (2022). Economic drivers of volatility and correlation in precious metal markets. Journal of Commodity Markets, 28, 100242.
Drabek, Z., & Payne, W. (2002). The impact of transparency on foreign direct investment. Journal of Economic integration, 777-810. https://www.jstor.org/stable/23000835
Ghani, M., Guo, Q., Ma, F., & Li, T. (2022). Forecasting Pakistan stock market volatility: Evidence from economic variables and the uncertainty index. International Review of Economics & Finance, 80, 1180-1189. https://doi.org/10.1016/j.iref.2022.04.003
Harvey, C. R. (1995). Predictable risk and returns in emerging markets. The review of financial studies, 8(3), 773-816. https://doi.org/10.1093/rfs/8.3.773
Hooper, V., Sim, A. B., & Uppal, A. (2009). Governance and stock market performance. Economic Systems, 33(2), 93-116. https://doi.org/10.1016/j.ecosys.2009.03.001
Husnain, M., Islam, K., & Ali, W. (2020). Reflection of regulatory announcement in equity market: fresh insight from oil & gas sector of Pakistan. Journal of Accounting and Finance in Emerging Economies, 6(3), 799-820. https://doi.org/10.26710/jafee.v6i3.1357
Islam, K., Bilal, A. R., Saeed, Z., Sardar, S., & Kamboh, M. H. (2023). Impact of government integrity and corruption on sustainable stock market development: linear and nonlinear evidence from Pakistan. Economic Change and Restructuring, 56(4), 2529-2556. https://doi.org/10.1007/s10644-023-09523-7
Joseph, N. L., Vo, T. T. A., Mobarek, A., & Mollah, S. (2020). Volatility and asymmetric dependence in Central and East European stock markets. Review of quantitative finance and accounting, 55(4), 1241-1303. https://doi.org/10.1007/s11156-020-00874-0
Kehinde, T., Chan, F. T., & Chung, S. H. (2023). Scientometric review and analysis of recent approaches to stock market forecasting: Two decades survey. Expert Systems with Applications, 213, 119299. https://doi.org/10.1016/j.eswa.2022.119299
Khan, J., & Khan, I. (2018). The impact of macroeconomic variables on stock prices: a case study of Karachi Stock Exchange. Journal of economics and Sustainable Development, 9(13), 15-25.
Khan, M. A., Ilyas, R. M. A., & Hashmi, S. H. (2018). Cointegration between institutional quality and stock market development. NUML International Journal of Business & Management, 13(2), 90-103.
Khandaker, S., & Al Farooque, O. (2021). Institutional quality, macroeconomic factors and stock market volatility: A cross-country analysis for pre, during and post global financial crisis. The Journal of Developing Areas, 55(1). https://doi.org/10.1353/jda.2021.0024
Kim, J. H. (2019). Multicollinearity and misleading statistical results. Korean journal of anesthesiology, 72(6), 558-569. https://doi.org/10.4097/kja.19087
Kirkulak Uludag, B., & Khurshid, M. (2019). Volatility spillover from the Chinese stock market to E7 and G7 stock markets. Journal of Economic Studies, 46(1), 90-105. https://doi.org/10.1108/JES-01-2017-0014
Klitgaard, R. (1991). Controlling corruption. Univ of California Press.
Kuzey, C., Uyar, A., Hamrouni, A., Kilic, M., & Boussaada, R. (2021). The link between institutional quality, ethical behaviors of firms, and market regulations on stock market developments. Managerial and Decision Economics, 42(4), 998-1021. https://doi.org/10.1002/mde.3288
Mallikarjuna, M., & Rao, R. P. (2019). Volatility experience of major world stock markets. Theoretical & Applied Economics, 4(621), 35-52.
Mamtha, D., & Srinivasan, K. S. (2016). Stock market volatility–conceptual perspective through literature survey. Mediterranean Journal of Social Sciences, 7(1), 208-212. DOI:10.5901/mjss.2016.v7n1p208
Masoud, N. M. (2013). The impact of stock market performance upon economic growth. International Journal of Economics and Financial Issues, 3(4), 788-798.
Ming, K. L. Y., & Jais, M. (2020). Impacts of macroeconomic environment and governance quality on the stock market. Jurnal Ekonomi Malaysia, 54(3), 133-145. http://dx.doi.org/10.17576/JEM-2020-5403-10
Morgan, T. (1964). The theory of error in centrally-directed economic systems. The Quarterly Journal of Economics, 78(3), 395-419. https://doi.org/10.2307/1879474
Mun, M., & Brooks, R. (2012). The roles of news and volatility in stock market correlations during the global financial crisis. Emerging markets review, 13(1), 1-7. https://doi.org/10.1016/j.ememar.2011.09.001
Munir, K., & Perveen, A. (2021). Impact of Total, Internal and External Government Debt on Interest Rate in Pakistan. Journal of Applied Economics & Business Research, 11(1), 25-40.
Naeem, M. A., Yousaf, I., Karim, S., Yarovaya, L., & Ali, S. (2023). Tail-event driven NETwork dependence in emerging markets. Emerging Markets Review, 55, 100971. https://doi.org/10.1016/j.ememar.2022.100971
Nguyen, T., Locke, S., & Reddy, K. (2015). Ownership concentration and corporate performance from a dynamic perspective: Does national governance quality matter?. International review of financial analysis, 41, 148-161. https://doi.org/10.1016/j.irfa.2015.06.005
Nguyen, T., Nguyen, A., Nguyen, M., & Truong, T. (2021). Is national governance quality a key moderator of the boardroom gender diversity–firm performance relationship? International evidence from a multi-hierarchical analysis. International Review of Economics & Finance, 73, 370-390. https://doi.org/10.1016/j.iref.2021.01.013
Nishat, M., Shaheen, R., & Hijazi, S. T. (2004). Macroeconomic factors and the Pakistani equity market [with Comments]. The Pakistan Development Review, 43(4), 619-637.
Ramchand, L., & Susmel, R. (1998). Volatility and cross correlation across major stock markets. Journal of Empirical Finance, 5(4), 397-416. https://doi.org/10.1016/S0927-5398(98)00003-6
Ritzer, G. (2004). Encyclopedia of social theory. Sage publications.
Roe, M. J., & Siegel, J. I. (2011). Political instability: Effects on financial development, roots in the severity of economic inequality. Journal of Comparative Economics, 39(3), 279-309. https://doi.org/10.1016/j.jce.2011.02.001
Sekati, B. N. Y., Tsoku, J. T., & Metsileng, L. D. (2020). Modelling the oil price volatility and macroeconomic variables in South Africa using the symmetric and asymmetric GARCH models. Cogent Economics & Finance, 8(1), 1792153. https://doi.org/10.1080/23322039.2020.1792153
Sharma, A., Sharma, V., & Tokas, S. (2022). Institutional quality and health outcomes: Evidence from the EU countries. Economics and Business Letters, 11(2), 70-78. doi:10.17811/ebl.11.2.2022.70-78
Song, Y., Tang, X., Wang, H., & Ma, Z. (2023). Volatility forecasting for stock market incorporating macroeconomic variables based on GARCH‐MIDAS and deep learning models. Journal of Forecasting, 42(1), 51-59. https://doi.org/10.1002/for.2899
Sonkavde, G., Dharrao, D. S., Bongale, A. M., Deokate, S. T., Doreswamy, D., & Bhat, S. K. (2023). Forecasting stock market prices using machine learning and deep learning models: A systematic review, performance analysis and discussion of implications. International Journal of Financial Studies, 11(3), 94. https://doi.org/10.3390/ijfs11030094
Van Thi Hong, P. J. (2020). Impacts of corruption control on economic growth in relationship with stock market and trade openness, The Journal of Asian Finance, Economics and Business, 7(12), 73-84.
Yalamati, S. (2023). Forecast Cryptocurrency Market Investments Based on Stock Market Performance. International Journal of Innovations in Applied Sciences & Engineering, 9(1), 19-27.