Degree
Master of Science in Finance
Department
Department of Finance
School
School of Business Studies (SBS)
Date of Submission
Fall 2025
Supervisor
Dr. Mohsin Zahid Khawaja, Assistant Professor, Department of Finance
Project Type
Research Project
Document Type
Restricted Access
Pages
viii, 19
Keywords
Sovereign risk, stock market, term spread, stock returns
Abstract
The pro-cyclicality of sovereign risk, driven by global systemic factors, has led to unprecedented volatility in stock returns, causing significant losses for investors in the stock market. In Pakistan, political instability and a deteriorating macroeconomic environment, exacerbated by high external borrowing from the IMF, have resulted in frequent changes in monetary policy, negatively impacting both the money and capital markets. The objective of this study was to empirically assess the influence of sovereign risk on stock returns, specifically the KSE 100 index. Additionally, the study explored how incorporating other macroeconomic variables, such as inflation, business confidence, economic policy uncertainty and exchange rates, might affect the relationship between sovereign risk and stock returns. By reviewing previous empirical studies, the research found varying impacts of term spreads on stock markets. To measure the impact, both linear and multiple linear regression analyses were conducted using monthly data from January 2015 to December 2024, sourced from Refinitiv Data stream. The variables included exchange rates, KSE 100 prices (from which returns were calculated), inflation rates, business confidence index, economic policy uncertainty index, 5-year and 10-year sovereign bond yields, and 6-month T-bills to calculate the sovereign term spread. The results revealed a weak and statistically insignificant impact of sovereign risk on stock returns, with only the exchange rate showing a modestly significant negative effect.
Recommended Citation
Sikander, H. (2025). Influence of sovereign risk on stock market returns in Pakistan (Unpublished graduate research project). Retrieved from https://ir.iba.edu.pk/research-projects-msfin/19
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