GARCH Risk Assessment of Inflation and Industrial Production Factors on Pakistan Stocks

GARCH Risk Assessment of Inflation and Industrial Production Factors on Pakistan Stocks

Shehla Akhtar (Department of Management Science, National University of Modern Languages, Pakistan) and Benish Javed (Department of Management Science, National University of Modern Languages, Pakistan)
Copyright: © 2012 |Pages: 16
DOI: 10.4018/ijrcm.2012100103
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Abstract

The purpose of the study was to measure the risk the return relationship of inflation and industrial production as macroeconomic variables against stock returns. The study extends the literature by using the GARCH model instead of the traditional Arbitrage Pricing Theory or the Capital Asset Pricing Model. The sample consisted of 50 companies listed on the Karachi Stock Exchange (KSE) in Pakistan. The data collection encompassed the period from July 1998 to December 2008. The macro economic indicators were inflation rate and growth rate of industrial production. The techniques included regression and first order Augmented Dick Fuller test (since it was a time series). The authors found a significant relationship between the macro economic indicators of inflation and industrial production against the sampled KSE returns. The sensitivity coefficients of industrial production and inflation were negative which indicated real sector risk and inflation unfavorably impacted the sampled KSE returns.
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3. Research Questions

The research questions addresses by the research are as follows:

  • a)

    To observe the association among inflation, industrial production and performance of stock returns;

  • b)

    To illustrate the risk return relationship between inflation rate and the industrial productivity and term structure;

  • c)

    To estimate the inflation and industrial productivity as macro economic risk factors against stock return by employing GARCH (1,1) model to determine the volatility.

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