Effect of Market Volatility, Inflation, and Interest Rates on Stock Market Returns: An Empirical Analysis

Abstract

This paper investigates the effects of market volatility, inflation, and interest rates on stock market returns, focusing on the Pakistan Stock Exchange (PSX) over a 10-year period. Utilizing secondary data on stock index performance, inflation rates, and interest rates, the study employs multiple regression analysis to assess the impact of these macroeconomic factors on market returns. The results reveal that market volatility and inflation have a significant negative effect on stock returns, indicating that periods of heightened volatility and rising inflation correspond to lower market performance. In contrast, interest rates show an insignificant relationship with stock returns, suggesting that investors in the PSX are less sensitive to interest rate changes compared to other economic factors. These findings contribute to the broader literature on emerging markets, highlighting the dominant role of inflation and volatility in shaping stock market outcomes. The study provides valuable insights for investors, who can use this knowledge to make informed decisions in response to fluctuating economic conditions, and for policymakers, who may need to focus on controlling inflation and stabilizing market conditions to promote healthy stock market performance in Pakistan. Overall, the research emphasizes the critical importance of macroeconomic indicators in influencing stock market returns.