Impact of Interest Rate Volatility and Exchange Rate Volatility on Stock Returns of Banks in Pakistan; A Comparative Study of Conventional and Islamic Banks”

Abstract

This study investigates the impact of interest rate and foreign exchange rate changes on Pakistan bank stock returns for both Islamic and conventional banks by the OLS and GARCH (1,1) estimating models using time series daily data from year 2008 to 2021 of 14 conventional and 2 Islamic banks regulated by SBP. According to the study, interest rates have a positive and significant impact on conventional banks, whereas exchange rate changes have a negative and significant impact on conditional bank stock returns. Furthermore, the sensitivity of conditional returns to interest rates is found to be larger than that of exchange rates. For GARCH result indicates that shocks to bank stock and index returns have long-term consequences and volatility decays more slowly the data also suggests that interest rate and exchange rate volatility are the two most important causes of conditional bank stock return volatility