Impact of Monetary Policy on Stock Market Return, Volatility, and Liquidity: Evidence from Pakistan

Abstract

This research investigates whether changes in monetary policy (proxied by the interest rate) impact the stock market return, volatility, and liquidity across three key indices of the Pakistan Stock Exchange: the KSE100, KSE30, and KMI30. Utilizing monthly data spanning from 2012 through 2025 and employing regression analysis, the findings demonstrate that an increase in the interest rate significantly increases stock market volatility across all three indices. However, monetary policy changes do not exert a statistically significant direct impact on stock market liquidity or stock market returns. Furthermore, a comprehensive multi-factor model reveals that while stock market volatility inversely reduces returns, enhanced stock market liquidity increases returns. Overall, the study concludes that monetary policy indirectly impacts investor performance by amplifying market volatility.