Modeling and Analyzing Macro-Economic Variables as Risk Factors: Evidence from Pakistani Stock Exchange
This study attempts to investigate seven macroeconomic risk factors’ effect on fifty stock returns of Pakistani stock market for the time period of July 1998 to June 2014 respectively. The sensitivity coefficients of macro-economic risk variables are identified as market return, money supply, indus...
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| Format: | Article |
| Language: | English |
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Shaheed Zulfikar Ali Bhutto Institute of Science and Technology
2017-12-01
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| Series: | JISR Management and Social Sciences & Economics |
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| Online Access: | https://jisrmsse.szabist.edu.pk/index.php/szabist/article/view/117 |
| _version_ | 1797851605673967616 |
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| author | Fauzia Mubarik Attiya Yasmin Javid |
| author_facet | Fauzia Mubarik Attiya Yasmin Javid |
| author_sort | Fauzia Mubarik |
| collection | DOAJ |
| description |
This study attempts to investigate seven macroeconomic risk factors’ effect on fifty stock returns of Pakistani stock market for the time period of July 1998 to June 2014 respectively. The sensitivity coefficients of macro-economic risk variables are identified as market return, money supply, industrial production, and call money rate, term structure of interest rate, exchange rate and inflation. This study jointly estimates economic risk factors and also risk premium associated with these risk factors by employing extended arbitrage pricing theory (APT) model by applying non-linear seemingly unrelated regression. The innovation of each economic variable is used as risk factor and the study estimates the sensitivities of risk factors and the premium for risk using extended APT model. The results indicate that the money supply risk positively affects stock returns and the industrial production, inflationary shock, exchange rate, call rate and the term structure shocks negatively affect the stock returns respectively. Among all the macro-economic risks, the risk premium for the stock returns is significant for facing market risk, inflation risk and interest rate risk. The results of the study imply that since risk premium is the reward for taking risk while holding stock market assets, if the predictable risk increases, it reduces uncertainty of the stocks. Therefore investors, authorities and policy makers are needed to take into account the economic risk factors while considering the sensitivity of stock returns in making decisions.
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| first_indexed | 2024-04-09T19:20:30Z |
| format | Article |
| id | doaj.art-bd7a875e8cf4412fa90bda44af521480 |
| institution | Directory Open Access Journal |
| issn | 2616-7476 1998-4162 |
| language | English |
| last_indexed | 2024-04-09T19:20:30Z |
| publishDate | 2017-12-01 |
| publisher | Shaheed Zulfikar Ali Bhutto Institute of Science and Technology |
| record_format | Article |
| series | JISR Management and Social Sciences & Economics |
| spelling | doaj.art-bd7a875e8cf4412fa90bda44af5214802023-04-05T15:21:29ZengShaheed Zulfikar Ali Bhutto Institute of Science and TechnologyJISR Management and Social Sciences & Economics2616-74761998-41622017-12-0115210.31384/jisrmsse/2017.15.2.1Modeling and Analyzing Macro-Economic Variables as Risk Factors: Evidence from Pakistani Stock ExchangeFauzia Mubarik0Attiya Yasmin Javid1 Assistant Professor Faculty of Management Sciences, NUML Islamabad campus Professor at Pakistan Institute of Development Economics This study attempts to investigate seven macroeconomic risk factors’ effect on fifty stock returns of Pakistani stock market for the time period of July 1998 to June 2014 respectively. The sensitivity coefficients of macro-economic risk variables are identified as market return, money supply, industrial production, and call money rate, term structure of interest rate, exchange rate and inflation. This study jointly estimates economic risk factors and also risk premium associated with these risk factors by employing extended arbitrage pricing theory (APT) model by applying non-linear seemingly unrelated regression. The innovation of each economic variable is used as risk factor and the study estimates the sensitivities of risk factors and the premium for risk using extended APT model. The results indicate that the money supply risk positively affects stock returns and the industrial production, inflationary shock, exchange rate, call rate and the term structure shocks negatively affect the stock returns respectively. Among all the macro-economic risks, the risk premium for the stock returns is significant for facing market risk, inflation risk and interest rate risk. The results of the study imply that since risk premium is the reward for taking risk while holding stock market assets, if the predictable risk increases, it reduces uncertainty of the stocks. Therefore investors, authorities and policy makers are needed to take into account the economic risk factors while considering the sensitivity of stock returns in making decisions. https://jisrmsse.szabist.edu.pk/index.php/szabist/article/view/117Arbitrage pricing theorymacroeconomic risk factorsrisk premiumNon-Linear Seemingly Unrelated Regression (NSUR)Pakistani Stock Market |
| spellingShingle | Fauzia Mubarik Attiya Yasmin Javid Modeling and Analyzing Macro-Economic Variables as Risk Factors: Evidence from Pakistani Stock Exchange JISR Management and Social Sciences & Economics Arbitrage pricing theory macroeconomic risk factors risk premium Non-Linear Seemingly Unrelated Regression (NSUR) Pakistani Stock Market |
| title | Modeling and Analyzing Macro-Economic Variables as Risk Factors: Evidence from Pakistani Stock Exchange |
| title_full | Modeling and Analyzing Macro-Economic Variables as Risk Factors: Evidence from Pakistani Stock Exchange |
| title_fullStr | Modeling and Analyzing Macro-Economic Variables as Risk Factors: Evidence from Pakistani Stock Exchange |
| title_full_unstemmed | Modeling and Analyzing Macro-Economic Variables as Risk Factors: Evidence from Pakistani Stock Exchange |
| title_short | Modeling and Analyzing Macro-Economic Variables as Risk Factors: Evidence from Pakistani Stock Exchange |
| title_sort | modeling and analyzing macro economic variables as risk factors evidence from pakistani stock exchange |
| topic | Arbitrage pricing theory macroeconomic risk factors risk premium Non-Linear Seemingly Unrelated Regression (NSUR) Pakistani Stock Market |
| url | https://jisrmsse.szabist.edu.pk/index.php/szabist/article/view/117 |
| work_keys_str_mv | AT fauziamubarik modelingandanalyzingmacroeconomicvariablesasriskfactorsevidencefrompakistanistockexchange AT attiyayasminjavid modelingandanalyzingmacroeconomicvariablesasriskfactorsevidencefrompakistanistockexchange |