Pakistan Journal of Applied Economics

19-40

Authors: Fazal HUSAIN & Jamshed UPPAL

This paper examines stock returns volatility in the Pakistani equity market. Using daily stock prices of 36 companies, 8 sector indices, and a market index, the Auto Regressive Conditional Heteroscedasticity (ARCH) class of models were applied. The analyses suggest that one of the factors causing high serial dependence in stock returns in the Pakistani equity market is the presence of conditional heteroscedasticity or volatility in stock returns and that even after controlling for volatility the returns in the market are, in general, predictable. The results show GARCH (I, I) to be an appropriate representation of conditional variance implying that current volatility in the market is significantly affected by past volatilities. There is also strong evidence of persistence in variance in returns implying that shocks to volatility continue for a long period. However, after accounting for the structural shift due to opening of the market, the persistence was found to decline significantly.

55-72

Authors: Eatzaz AHMAD & Sheena Naz ALI

This study decomposes major price indices in Pakistan into permanent and transitory components using the Beveridge and Nelson (1981) methodology. The results show that most of the price variations are permanent with a major portion being deterministic. The transitory variations in the consumer price index are only slightly greater than those in the wholesale price index. Therefore, rent-seeking activities at the retail level are limited. Although a similar pattern holds for the open market versus official exchange rates, rent seeking can be prevalent because the market is thin and operates on a spot basis. The study concludes that a forecasting strategy based on the Beveridge-Nelson approach removes the bulk of uncertainty from prices, though risk cannot be avoided.