Economic Policy Uncertainty and Pakistan Equity Market

Abstract

From 2014 to 2024, this paper investigates how Economic Policy Uncertainty (here after EPU) affects the performance and behavior of the Pakistan equities market. It emphasizes how changes in policy clarity affect market returns, trading activity, and investor decision-making. Included also are key macroeconomic factors as inflation and changes in exchange rates. The study intends to offer deeper understanding of the connection between uncertainty and financial performance in an emerging market setting. The analysis utilizing descriptive statistics and quantile regression approaches indicates that EPU exerts a statistically significant and favorable influence on stock returns across all quantiles. The impact is greatest in lower quantiles, suggesting more investor reaction during market declines. This implies that, instead of consistently lowering returns, uncertainty can set off risk-taking and speculative activity. The findings show a nonlinear link whereby EPU serves as a return driver and a risk indication. These results provide important consequences for regulators, investors, and legislators in Pakistan. Better policy communication and openness can help to steady market reactions to uncertainty. Investors have to change their risk management techniques depending on different market circumstances as well. All things considered, the study emphasizes the need of knowing EPU's influence on equities market behavior and direction of economic decision-making.

Keywords: Economic Policy, Uncertainty, Pakistan, Equity Market, EPU’s, Stock Returns