Do changes in macroeconomic variables affect stock market volatility? : -A GARCH-S approach in examining the volatility of the Swedish stock market

Abstract: The behaviour of stock markets is characterized by volatility, that is the rate at which stock prices moves up and down within a short period of time. The importance of understanding the nature of volatility is that excessive volatility may prevent the smooth functioning of financial markets and adversely affect the performance of the economy. Economic theory and previous studies have suggested that the volatility of stock prices are affected by fluctuations in macroeconomic factors due to the ability of these factors to determine stock prices. The inclusion of macroeconomic variables in the modelling of the volatility of stock prices has therefore been investigated to further explain the volatility of stock prices. The purpose of this thesis is to examine whether changes in macroeconomic variables have an effect on the volatility of the Swedish stock market. Using GARCH-S models, this study was able to find that changes in the exchange rate, the price of oil and prices of international financial markets had significant effects on the volatility of the Swedish stock market, proxied by the OMX Stockholm 30 Index. However, the study was not able to find any significant effects of changes in the interest rate, the inflation or the money supply on the volatility of the OMX Stockholm 30 Index. These findings suggest that changes in macroeconomic variables may help to understand the nature of volatility.