IMPACT OF MACRO ECONOMIC FACTORS ON THE STOCK MARKET MEDIATING ROLE OF THE UNSYSTEMATIC RISK

Abstract

This study examines the mediating role of unsystematic risk in the relationship between macroeconomic factors and the performance of Pakistan's stock markets. The researcher gathered data from two sources: stock market data from the Pakistan Stock Exchange and respective company websites (2000–2022)   from the Pakistan Mercantile Exchange (2010–2022). The data for selected macroeconomic variables were obtained from the IMF's International Financial Statistics website. The data is quantitative and analyzed through various statistical tools and tests, including the Breusch-Pagan-Godfrey test, Breusch-Godfrey Serial Correlation LM Test, Ramsey RESET test, Augmented Dickey-Fuller (ADF) test, and Phillips-Perron test. Regression analysis has been employed to test the causal relationships among these variables. The findings indicate that macroeconomic factors such as inflation, interest rates, exchange rates, and GDP growth significantly impact market performance; however, their effect is often mediated by changes in unsystematic risk. As macroeconomic conditions change, they affect individual companies' operational stability and financial health, altering the unsystematic risk associated with them. For example, rising interest rates increase companies' borrowing costs, increasing their risk exposure. The study's originality is that very little work has been done regarding unsystematic risk as a mediator, particularly in the Pakistan capital markets. Overall, the findings add clarity to how macroeconomic variables influence market results, thus enhancing comprehension of market operations in emerging economies like Pakistan. Based on the study's findings, various steps are suggested to be adopted to work on reducing unsystematic risk and stabilizing markets. Accordingly, the recommendation to policymakers is to strengthen institutional frameworks on monitoring macroeconomic impacts in sectors or companies. They should thus know what to protect and how to manage the various risks more effectively.

Keywords: macro-economic factors (interest rate, inflation rate, exchange rate, GDP, Import, Export), Stock market, unsystematic risk.