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

Syed Jawad Hussain Shahzad, Muhammad Zakaria, Naveed Raza and Sajid Ali

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Bank stock returns; Market rate; Interest rate; Foreign exchange rate; GARCH; Pakistan (search for similar items in EconPapers)
JEL-codes: G17 G21 G28 (search for similar items in EconPapers)
Date: 2014-11-01
New Economics Papers: this item is included in nep-rmg
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