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On the Bank Stocks Return and Volatility: Tale of a South Asian Economy

Author

Listed:
  • Shahzad, Syed Jawad Hussain
  • Zakaria, Muhammad
  • Raza, Naveed
  • Ali, Sajid

Abstract

This paper examines Pakistani Banks stock return and volatility relationship with market, interest rate and foreign exchange rate. The study extensively applies different statistical approaches to model return and volatility relation. First, Ordinary Least Square (OLS) multiple regression model is applied for estimation of return relation. Further, Generalize Method of Movement (GMM) is applied to cater the endogeniety issue. Secondly, Due to presence of Conditional Heteroskedasticity, Weighted Least Square (WLS) and Generalize Auto Regression Conditional Heteroskedasticity - GARCH (1,1) estimation model is applied to estimate conditional return and volatility. Interest rate and foreign exchange rate have significant impact on unconditional and conditional bank stock returns under different model specifications. Market return is a determining factor in bank stock pricing. The results infer that bank volatility is significantly related with interest rate and foreign exchange rate risk. The volatility of bank stock returns is persistent with slower decay over time.

Suggested Citation

  • Shahzad, Syed Jawad Hussain & Zakaria, Muhammad & Raza, Naveed & Ali, Sajid, 2014. "On the Bank Stocks Return and Volatility: Tale of a South Asian Economy," MPRA Paper 60155, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:60155
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    File URL: https://mpra.ub.uni-muenchen.de/60155/1/MPRA_paper_60155.pdf
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    References listed on IDEAS

    as
    1. Chkili, Walid & Aloui, Chaker & Nguyen, Duc Khuong, 2012. "Asymmetric effects and long memory in dynamic volatility relationships between stock returns and exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 738-757.
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    More about this item

    Keywords

    Bank stock returns; Market rate; Interest rate; Foreign exchange rate; GARCH; Pakistan;

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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