Macroeconomic Uncertainty of the 1990s and Volatility at Karachi Stock Exchange

This paper examines the short- to medium-term trends and volatility in Karachi Stock Exchange (KSE) and further explores the nature of relationship between stock market activities and a set of macroeconomic variables in the 1990s. The analysis is based on daily and monthly data on general stock price index and trading volume and monthly data on interbank call rate, wholesale price index, quantum index of manufacturing sector’s output and monetary aggregate M2, and it covers the period from January 1992 to June 1999. This paper finds that in the 1990s, the stock market of Karachi had become more volatile both on short-term (daily) and medium-term (monthly) basis. Furthermore, strong volatility inertia was present in stock price index, trading volume, wholesale price index, manufacturing output and money supply. It also finds that there is no systematic relation between stock price volatility and real or nominal macroeconomic volatility. Likewise, for the sample period, a volatile trading volume was neither due to a volatile stock price nor due to the fluctuations and shocks taking place in the economy.