IMPACT OF EXCHANGE RATE VOLATILITY ON STOCK MARKET DEVELOPMENT: CASE OF PAKISTAN

Abstract

The study aims to investigate the relationship between exchange rate volatility and stock
market development of Pakistan. Study utilized annual data from 1980-2017. Volatilities are
calculated by using quarterly data of real exchange rate using GARCH. Other independent
variables included in the study are foreign direct investment, industrial production, broad
money, GDP growth and real exchange rate. ARDL bound testing approach was used for
econometric analysis. Results indicate strong negative significant effect of real exchange rate
volatility on stock market development of Pakistan. While industrial production, broad
money, GDP, FDI and real exchange rate demonstrated strong positive relation with stock
market development. Based on the results, it is suggested that there is need to focus on
controlling currency volatility in country and to provide such environment, which may
facilitates the investments