Volatility in Stock Market Returns and Macroeconomic Factors in Pakistan

This study examines the intricate relationship between macroeconomic factors and stock market returns in Pakistan over the period 1999–2023. Utilizing advanced econometric techniques, including Autoregressive Conditional Heteroskedasticity (ARCH), Generalized Autoregressive Conditional Heteroskedasticity (GARCH), and Threshold GARCH (TGARCH), the research investigates the impact of GDP growth, inflation, and exchange rate fluctuations on stock market volatility. The empirical findings highlight the crucial role of macroeconomic stability in mitigating systemic risks and enhancing financial resilience. The GARCH results reveal significant positive coefficients for money supply (1.0710, p-value: 0.0000), GDP growth (1.5856, p-value: 0.0501), and exchange rate fluctuations (1.6557, p-value: 0.0111), while inflation exhibits a marginally significant impact (1.6084, p-value: 0.0620). Similarly, the TGARCH model confirms that all independent variables, particularly GDP growth, have a significant positive effect on stock market returns. These findings suggest that policymakers should closely monitor inflationary pressures and implement targeted measures to control inflation. By addressing key macroeconomic factors, policymakers can reduce stock market volatility, strengthen investor confidence, and foster a more stable financial environment in Pakistan.