Abstract

The study examines the relationship between capital flow, return of stock indices and exchange rate. This paper documents a significant relationship between capital flow and market volatility but returns of stock exchange and exchange rate are found to be insignificant. The study will be helpful for the policy makers so that they will be able to take the decision by considering the impact of capital flow. Because of the modern technology capital mobility financial and economic agent because it signify a measure increase with an accelerating role. Risk assessment of risk exposure in their investment. The capital flow plays analysis for the stock market after liberalization has an important role in this regard. Unstable stock market is assumed more importance in the world. Usefulness of an important concern for policy makers because instability efficient stock markets in dynamic resource is well known. of the stock market creates uncertainty and affects the Karachi Stock Exchange once again started moving in growth success. upward direction and performance of the economy of The purpose of the paper is to investigate with the Pakistan has increased. Investigating the behavior of aim of either the capital flow from the other countries volatility using a new set of variables is important. carries volatility with them or not. This study will be Stock market volatility is of vital important for helpful to investigate that volatility shocks from the other investors. Stock return usually follows the random countries will affect Karachi stock exchange and Colombo path and touches the maximum and minimum level. stock exchange. The volatility of stock price can be observed from its The second important purpose is to study with the fluctuation from the mean. Why we Study volatility in aim of either the shocks in the capital flow will affect the stock market and capital flows? volatility in the exchange rate or not. In latest years The capital flow may have different effects on volatility in equity market have turn out to be a topic of exchange rate and stock market volatility. joint worry for individual stake holders. Stock return Large capital inflows can damage the economy in volatility cause delay in economic performance during many ways. Capital flow raise asset bubbles and customer spending. Stock Return instability might too promote too much borrowing, but they also spoil the have an effect on trade asset expenses. Additional, the competitiveness of the export sector, they can also cause intense instability might upset the silky performance of a rapid increase in rates of exchange. Open account debit the monetary system and show the way to structural or of a country will build it yet further at threat to a quick method differences. setback of funds. On the other side, if central banks The stock market in Pakistan has had its fair interfere to seize down their currencies, the increase of contribute to trouble due to extreme speculation resulting funds can go in front to extremely loose financial in excessive volatility. Certainly, in the early 1990's the circumstances and getting higher inflation. confidence of investors to some extent has been eroded Stock market volatility prediction is imperative to

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