IMPACT OF ECONOMIC POLICY UNCERTAINTY ON KSE-100 STOCK MARKET RETURNS: EVIDENCE FROM PAKISTAN

Abstract

Economic Policy Uncertainty (EPU) has emerged as a critical determinant of financial market behavior, particularly in politically and economically volatile emerging market economies. This study examines the impact of EPU on KSE-100 stock market returns in Pakistan, while controlling for macroeconomic fundamentals including inflation rate, interest rate, exchange rate, and GDP growth. Using monthly time-series data spanning 105 observations, a multiple linear regression framework is employed and analyzed through IBM SPSS Statistics Version 26.0. The overall regression model is statistically significant, F(5, 99) = 18.126, p < .001, explaining 47.9% of the variance in KSE-100 returns (R² = .479, Adjusted R² = .458). EPU exerts a significant negative effect on KSE-100 returns (β = −0.392, t = −3.854, p < .001), confirming that elevated policy uncertainty depresses investor confidence and suppresses equity market performance. Inflation rate (β = −0.211, p = .015), interest rate (β = −0.254, p = .007), and exchange rate (β = −0.192, p = .013) also exhibit significant negative effects on market returns, while GDP growth (β = .238, p = .005) demonstrates a significant positive association. All five research hypotheses are supported. The findings carry important implications for investors navigating politically sensitive Pakistani markets, for monetary and fiscal policymakers seeking to minimize uncertainty-induced market distortions, and for the broader literature on EPU transmission mechanisms in frontier and emerging capital markets.