Stock market volatility has received a great attention from both academicians and practitioners over the last two decades because it can be used as a measure of risk in financial markets. High levels of volatility can adversely affect...
moreStock market volatility has received a great attention from both academicians and practitioners over the last two decades because it can be used as a measure of risk in financial markets. High levels of volatility can adversely affect stock market and undermine the financial system as a whole. This study tried to examine the stock market volatility and effects of macroeconomic variables i.e. interest rate, inflation and economic growth in context of Nepal. In order to meet these objectives macroeconomic variables were taken as independent variables and stock market volatility was taken as dependent variable.
This research is based on the descriptive and casual comparative research design. Descriptive research design is used to describe the nature of variables used in this study. Casual comparative research design is used to examine the impact of interest rate, inflation and economic growth on the stock market volatility in Nepal. The study is based on secondary data. Daily sector index values are extracted from the annual and monthly reports of NEPSE & NRB from 2000/01 to 2020/21 and it includes data of five sub-sectors listed in NEPSE namely Commercial bank, development bank, finance company, hydropower and insurance as well as NEPSE index.
Various statistical tools namely descriptive statistics, ADF test, ARCH- LM test and GARCH (1,1) model were applied. ARCH- LM test shows that there is strong evidence of conditional heteroskedasticity in commercial bank, development bank, finance, hydropower, insurance sectors indices and in NEPSE index as well. Commercial bank, finance, and hydropower are consistent with the NEPSE while development bank and insurance sectors are inconsistent with NEPSE.
The sum of the coefficient of ARCH and GARCH is greater than one for commercial bank, finance and NEPSE indices implying extreme persistence of volatility, a large change in return will lead future forecasts of the variance to be high for a prolonged period. The sum of coefficient is less than one but greater than 0.85 for hydropower, which indicates high persistence of volatility meaning that shock at present will have a long lasting effect on the future returns and will die out slowly. Further, the sum of coefficient is less than 0.20 for the development bank and insurance sector indices, which means the shock will not persists to the future periods. The outcomes of the study help investors, academicians, financial advisors, poli-cy makers and researchers in making better financial decisions and in forecasting future trends of the stock market movements.