EXCHANGE RATE VOLATILITY IN PAKISTAN'S POLITICAL CONTEXT

Abstract

Exchange rates play a crucial role as economic indicators in developing nations such as Pakistan, where their instability can have profound effects on economic stability. This study investigates the dynamics of asset returns, risk factors, and exchange rate volatility under different political systems, focusing on both daily and monthly frequencies. Utilizing daily and monthly time-series data on U.S. dollar exchange rates from 1981 to 2021, the research categorizes this period into three political eras: pre-autocracy (1988-1998), autocracy (1999-2008), and post-autocracy (2009-2022). The GARCH family of models is employed to analyze exchange rate volatility within these political contexts. The results indicate that pre- and post-autocracy regimes exhibit minimal or insignificant average daily returns, while monthly returns are positive and statistically significant. In contrast, autocracy regimes show zero or insignificant average returns in both daily and monthly exchange rates. The study identifies an asymmetric impact of positive and negative news across all regimes and frequencies, except for post-autocracy's monthly exchange rate, which displays symmetry. Notably, positive news has a more pronounced influence than negative news in all regimes, highlighting an asymmetry in news impact. However, the impact of positive and negative news is symmetric in the monthly exchange rate during post-autocracy. The study suggests a direct correlation between the magnitude of democracy and autocracy and heightened exchange rate volatility. Emphasizing the lower risk and higher returns of monthly exchange rates, it recommends that governments, investors, and traders focus on monthly investments, trading strategies, and policy formulation. The observed symmetry in the impact of disruptive events within the monthly exchange rate, particularly in the current era, holds promise for informed policy and decision-making.