Economic Determinants of Stock Market Volatility in Pakistan: Exploring the Moderating Impact of Political Stability

Abstract

The study examines the effect of the variable’s inflation, global oil price index price, and foreign remittances on stock market volatility represented through movement in the KSE 100 index, focusing on political stability as a moderator. The empirical evidence suggests that inflation and the global oil price index reflect insignificant direct influence on the stock market volatility. However, their influence becomes significant in the presence of political stability. Political stability increases investor confidence, reduces risk perception, and mitigates the risk of macroeconomic shocks that lead to reduced stock market volatility. The findings emphasized the critical role of governance in fostering the resilience of the financial market, especially for emerging economies like Pakistan. Future studies could probe further into the sectoral dynamics and consider other alternative variables as moderators, such as institutional quality, to provide detailed insight into the behaviors of stock market performance in developing economies tend to exhibit. These findings have many implications for policymakers, emphasizing governance reforms, stabilization policies of the macroeconomy, and diversification of markets to ensure the financial sector's stability.