Modeling Uncerainty and Investment as Determinent Of Returns From Pakistani Insurance Companies

This paper tests pair-wise causal relationships between uncertainty, returns and investment using unbalanced panel data of the 13 insurance companies listed in the KSE for the period from 1996 to 2008. Volatility of returns from the daily stock was measured using the GARCH (p, q) for appropriate values of p and q. The study applied panel data models in the lines of common constants, fixed effects and random effects in order explore effects of uncertainty and investment on returns. The results show significant positive effect of uncertainty on the returns from investment. This subsequently recommends that investment under volatile conditions might prove a blessing for the investors of the insurance stocks. These findings are contradictory to the results of some of the previous studies. For most of the stocks, hypothesis of “investment (I) does not Granger cause uncertainty (H)” or “uncertainty (H) does not Granger cause investment (I)” could not be rejected. The study finds that change in returns from securities definitely brings about changes in the risk and uncertainty. JEL classification: C1, C13, G2 Index Term— Investment; Stock market volatility; Uncertainty, Returns, Insurance, KSE, Pakistan.