Effects of economic factors on stock price volatility

Topics: Stock market, Inflation, Stock exchange Pages: 30 (7000 words) Published: October 11, 2014


CHAPTER # 1

1.0 Introduction
1.1 Background:
The related study is carried for determining the different changes that occur on market stock price volatility overtime. Volatility is defined as a statistical measure of the distribution of returns for a provided market index. Commonly, the greater the volatility, the uncertain the security is. Pakistani economy heavily depends upon Karachi stock exchange; therefore, any change that takes place in this market has a remarkable overall impact on the country’s economy. The individual interest motivates us to explore the topic further deeply in a more satisfactory manner. The masterpiece created by Charles K.D. Adjasi over this subject inspires us to study this phenomenon more sincerely and provokes a thinking to evaluate the association of different variables on stock price volatility. The due impact of macroeconomic uncertainty is the main focus of this research paper. The nature and various manners of stock markets have gained a lot of interest in theoretical and strategic circles. More precisely, the effect of macroeconomic fundamentals on stock market volatility has created a lot of interest. It is argued that if the value of communal equity on the whole rests on the health of the economy, thus would in return affect volatility in stock supposing reliable discount rates (Liljeblom and Stenius, 1997). Money supply also affects stock returns through inflation. Here, due to the affirmative relationship between money supply and inflation, a growth in money supply decreases stock prices (Dhakal et.al, 1993). Furthermore, a case theory suggests that a rise in money supply results in a portfolio shift from non-interest money assets to monetary assets including stocks. Fama (1990), Geske and Roll (1983) also declare that economic activity commissioned by industrial output has a progressive impact on stock prices through its influences on expected future cash flows. Oil and prduct prices are also postulated to capture the possible effects of external stock side tremors. An increase in oil prices will cause an increase in production costs and will result in decreasing future cash flows. Moreover, this will also cause an adverse impact on stock market returns (Anderson and Subbaraman, 1996).
1.2 Problem of the Statements:
Many studies have been conducted on the determinants which put effects on stock price volatility in different regions. Some researchers conducted the study in the relationship with finance variables and some took other variables. Adjasi, C. (2009), examine the macroeconomics uncertainty and conditional stock price volatility in frontier African markets. Results suggested that the volatility of stock price increases due to high volatility of coca price and interest rate whereas the volatility of stock price decreases due to high volatility of gold price, oil price and money supply. Olsen, R.A. (2012) examines the study of the influence of effect of relationship between risk perceptions and expected stock returns on stock price volatility: new theory. The result of the study concluded that there is an inverse relationship between risk perceptions and expected return. This can affect stock price volatility in a positive manner. After reviewing so many researchers found that still there is the need to expand the study on stock price volatility, and to measure the effects of economic factors in the quality dimensions of Pakistani...

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