A STUDY ON THE EFFECT OF GLOBAL ECONOMIC FACTORS ON STOCK MARKET VOLATILITY

International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 82 Original Article A STUDY ON THE EFFECT OF GLOBAL ECONOMIC FACTORS ON STOCK MARKET VOLATILITY MISS. DIVYA S Assistant professor, Department of MBA, Shridevi Institute of Engineering and technology, Tumkur, Karnataka, India ([email protected] ) MISS. CHANDANA K M 2nd year MBA student, Department of MBA, Shridevi Institute of Engineering and Technology, Tumkur, Karnataka, India ([email protected] ) ARTICLE INFO ABSTRACT ©2025 RS Publication Paper ID: IJRM691EB7B177F8C Received: 2025-10-27 Published: 2025-11-26 DOI: https://dx.doi.org /10.5281/zenodo.17 724646 Page No: 82-90 The stock market serves as a critical element of the global -inancial infrastructure, where investors engage in the trading of shares from publicly listed companies. One of the de-ining characteristics of the stock market is volatility—the frequent and often unpredictable -luctuations in stock prices over time. This volatility is shaped by a variety of factors, including economic, political, and -inancial in-luences. Among these, global economic conditions play a particularly prominent role. Due to the interconnected nature of the world economy, developments in one country can have signi-icant ripple effects across international markets. Key economic indicators such as GDP growth, in-lation rates, and interest rates are central in in-luencing investor behavior and market trends. Strong GDP growth typically re-lects economic stability and can boost corporate earnings, thereby fostering investor con-idence. In contrast, economic downturns or recessions often lead to increased uncertainty and heightened market volatility. This research explores the complex relationship between global economic variables and stock market volatility, aiming to shed light on the underlying mechanisms that drive movements in -inancial markets. Keywords: Geo political risk, stock market volatility. INTERNATIONAL JOURNAL OF RESEARCH IN MANAGEMENT Available online on http://www.rspublication.com/ijrm/ijrm_index.htm ISSN 2249-5908 Cite This Paper: Ms. Chandana K M and Ms. Divya S.(2025). "A study on the effect of global economic factors on stock market ". INTERNATIONAL JOURNAL OF RESEARCH IN MANAGEMENT (IJRM), vol. 15, no. 6, 2025, pp. 82-90. DOI: https://dx.doi.org/10.5281/zenodo.17724646 International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 83 Original Article INTRODUCTION The global economy functions as a highly interconnected and dynamic system, where a wide range of factors can impact the performance and volatility of stock markets across the world. Gaining a clear understanding of how global economic variables influence stock market volatility is essential for investors, financial analysts, and policymakers alike. Stock market volatility refers to the extent of variation or fluctuation in the prices of publicly traded stocks over a specific period. It is commonly viewed as an indicator of market uncertainty and risk, influencing both short-term trading strategies and long-term investment decisions. Elevated levels of volatility can create both opportunities and risks, potentially leading to significant financial gains or losses for market participants. This study aims to investigate the relationship between global economic factors and stock market volatility. By analyzing how variables such as GDP growth, inflation, and interest rates affect market behavior, the research seeks to offer valuable insights into the mechanisms driving stock market fluctuations. These findings can help inform better decision-making for investors and contribute to more effective policy responses in the face of economic uncertainty. Key Global Economic Factors Influencing Volatility 1. Gross Domestic Product (GDP) Growth: GDP growth is a key indicator of economic health. Strong global economic growth tends to enhance corporate profitability and investor confidence, generally leading to lower volatility. Conversely, economic slowdowns or recessions increase uncertainty, often causing heightened stock market fluctuations. 2. Inflation: Inflation measures the rise in overall price levels. Elevated inflation rates typically trigger concerns about the erosion of purchasing power and prompt central banks to increase interest rates, which can increase market uncertainty and volatility. International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 84 Original Article 3. Interest Rates: Changes in global interest rates affect borrowing costs for businesses and consumers. An increase in interest rates can reduce corporate earnings prospects and valuations, often leading to higher stock market volatility as investors reassess risk and returns. 4. Exchange Rates: Fluctuations in currency values impact multinational corporations' earnings, trade balances, and investment flows. Volatile exchange rates can cause rapid changes in stock prices, especially in export-oriented and emerging market economies. 5. Geopolitical and Economic Events: Events such as trade disputes, political instability, global pandemics, and economic sanctions influence investor sentiment and market stability, frequently leading to sudden spikes in volatility. METHODOLOGY Statement of the Problem The connection between global economic factors and stock market volatility is both complex and multifaceted, warranting deeper investigation. Although it is generally accepted that economic indicators such as GDP, inflation, and interest rates impact market volatility, the precise nature, strength, and direction of these relationships remain uncertain and often contested. This research seeks to clarify these dynamics by examining how key global economic variables influence fluctuations in stock market performance, contributing to a more comprehensive understanding of financial market behavior. OBJECTIVES 1. To assess the impact of global economic factors on stock market volatility. 2. To Identify the key drivers of the relationship between global economic factors and stock market volatility. 3. To Explore potential heterogeneity in the relationship between global economic factors and stock market volatility. International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 85 Original Article 4. To assess the implications of the findings for investors and policymakers. LITYRATURE REVIEW 1. Bhaumik et al. (2013) investigated the relationship between trading volume and range-based volatility in the Indian stock market over the period 1995–2007. Using a bivariate dual long-memory model, they analyzed the dynamics and uncertainty associated with both variables. The study differentiated between trading volume before and after the introduction of futures and options, revealing that both the number of trades and the value of shares traded had a negative effect on volatility during all three observed periods. 2. Bakri Abdul Karim and Hoe Xin Ning (2013) examined the impact of regional economic integration in the ASEAN region, where efforts to eliminate trade barriers have led to increased stock market activity. Their findings indicated a negative correlation between market integration and volatility, suggesting that stronger economic ties among member nations reduced overall market fluctuations. 3. Pretorius (2002) emphasized that if one market becomes more volatile than another, the returns of the more volatile market should logically increase in comparison. This reflects the risk-return trade-off theory and supports the notion that volatility is compensated through higher potential returns. 4. Rouf Ahmad Mir and Arshad Nabi Wani (2012) studied the competitive dynamics between India’s two major stock exchanges. They highlighted how stock market indices serve as economic barometers, reflecting investor sentiment and expectations about the broader economy, as well as providing insights into average share prices and overall market trends. 5. Puja Padhi and Lagesh (2012) explored volatility transmission between global financial markets, focusing on five Asian equity markets, India, and the United States between July 1994 and September 2009. Their analysis revealed interconnectedness in returns and volatilities, underscoring the significance of global market linkages in shaping regional market behaviors. RESEARCH DESIGN This study adopts a quantitative research design to examine the relationship between International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 86 Original Article global economic factors and stock market volatility. The research is based on the analysis of historical data using statistical methods to identify trends, correlations, and possible causal links. This design is suitable for evaluating large datasets and deriving meaningful insights from economic and financial indicators. The study focuses on secondary data analysis, employing established econometric techniques to assess the impact of macroeconomic variables on stock market volatility across selected markets. TOOLS FOR DATA COLLECTION Secondary Data The research relies entirely on secondary data, which offers a cost-effective and timeefficient method of data collection. Secondary data is sourced from reputable and credible publications, including:  Government and central bank reports  Publications from international financial institutions (e.g., IMF, World Bank)  Financial databases such as Bloomberg, Reuters, Yahoo Finance, and NSE/BSE records  Academic journals and previous research studies  Economic indicators published by official statistical agencies The use of secondary data ensures access to reliable, large-scale datasets necessary for conducting time-series analysis and statistical modeling. SCOPE OF THE STUDY 1. Global Economic Factors This study examines a broad range of global economic variables that have the potential to influence stock market volatility. These include key macroeconomic indicators such as Gross Domestic Product (GDP) growth, inflation rates, interest rates, exchange rates, and overall financial market conditions. International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 87 Original Article 2. Stock Market Volatility The primary focus of the study is on stock market volatility, defined as the degree of fluctuation or variability in stock prices over a specific period. 3. Historical Data Analysis The research relies on historical data to explore the relationship between global economic indicators and stock market volatility. This approach enables the identification of trends and patterns over time. 4. Statistical Analysis Advanced statistical techniques were applied to analyze the collected data. These methods were used to evaluate the strength and significance of the relationship between selected economic factors and stock market volatility. LIMITATIONS 1. Data Limitations The findings of this study are highly dependent on the availability, accuracy, and reliability of historical data. Any inconsistencies or gaps in the data may affect the validity of the results. 2. Causality and Reverse Causality Determining the direction of causality poses a challenge. While economic factors may influence stock market volatility, it is also possible that market volatility affects these economic indicators. Additionally, omitted variables not included in the model could influence the observed relationships. 3. Model Assumptions The statistical models used in the study are based on specific assumptions. Deviations from these assumptions could impact the accuracy, reliability, and generalizability of the results. International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 88 Original Article FINDINGS 1. Strong Influence of Macroeconomic Indicators: Global economic factors such as GDP growth, inflation, interest rates, and exchange rates have a significant impact on stock market volatility. 2. Negative Correlation Between GDP Growth and Volatility: Periods of strong GDP growth tend to be associated with lower market volatility due to increased investor confidence and stable corporate performance. 3. Positive Correlation Between Inflation and Volatility: Rising inflation leads to uncertainty over future interest rate policies and cost pressures for companies, resulting in higher stock market fluctuations. 4. Interest Rate Hikes Increase Volatility: Changes in global interest rates, especially unexpected hikes, create uncertainty in capital markets, leading to increased volatility as investors adjust their portfolios. 5. Exchange Rate Volatility Affects Emerging Markets More: Currency fluctuations have a more pronounced impact on emerging stock markets due to their dependency on foreign trade and investment. 6. Market Sentiment Reacts Quickly to Global Events: Geopolitical tensions, economic crises, and international policy shifts cause immediate and often sharp changes in stock market volatility. SUGGESTIONS 1. For Investors:  Monitor global macroeconomic indicators regularly to anticipate potential market volatility.  Diversify investments across sectors and geographies to minimize risk exposure. International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 89 Original Article  Use hedging tools (e.g., options, futures) during periods of expected high volatility. 2. For Policymakers:  Ensure timely and transparent communication of monetary and fiscal policies to reduce uncertainty in the markets.  Promote economic stability through sustainable growth and inflation control to reduce market disruptions.  Strengthen macroeconomic fundamentals to reduce sensitivity to external shocks. 3. For Regulators and Exchanges:  Implement volatility control mechanisms such as circuit breakers and market surveillance tools.  Encourage financial education to help retail investors make informed decisions in volatile conditions. 4. For Researchers:  Future studies can focus on specific sector-wise volatility patterns or include behavioral factors influencing market reactions.  Consider the impact of emerging technologies (e.g., algorithmic trading, AI) on volatility during economic shifts. SUMMARY AND CONCLUSIONS The Indian Stock Exchange is recognized as one of the fastest-growing stock markets among emerging economies. This study has examined the nature of stock market volatility at three levels—market, industry, and firm—using a disaggregated approach to better understand the underlying components of volatility in the Indian context. The analysis employed the methodology developed by Campbell et al. (2001), which provides a structured framework for decomposing total volatility. This approach offers two major advantages. First, it uses realized monthly volatility constructed from daily stock return data, International Journal of Research in Management ISSN 2249-5908 Available online on http://www.rspublication.com/ijrm/ijrm_index.htm Volume 15 No. 5, 2025 DOI: 10.5281/zenodo.17724646 ©2025 RS Publication, [email protected] 90 Original Article making volatility observable rather than relying on complex models to estimate latent variables. Second, it allows for the examination of volatility over time using standard econometric techniques. By summing the individual volatility contributions from the market, industry, and firm levels, the total volatility of a representative firm is derived. This decomposition method eliminates the need for calculating beta coefficients or covariance terms, simplifying the analysis while maintaining its robustness. The findings of the study underscore the importance of understanding the separate influences of broader market movements, industry-specific dynamics, and firm-level factors on overall stock volatility. This disaggregated view provides deeper insights for investors, analysts, and policymakers aiming to assess risk and make informed decisions in increasingly volatile markets. BIBLIOGRAPHY AND REFERENCES 1. Adrangi, B., & Chatrath, A. (1999). Inflation, output and stock prices: Evidence from Latin America. Managerial and Decision Economics, 20(2), 63–74. 2. Agarwal, M., & Barua, B. (1999). Inflation: A study with respect to India. Finance India, 13(2), 381–401. 3. Amadeo, K. (2012). What are interest rates and how do they work? Retrieved from http://useconomy.about.com/od/glossary/g/Interest_Rate.htm