Saif ul RAHMAN,* Abdul RASHID** and Muhammad ILYAS***
Irregular behavior of stock market affects all sectors of economy however, financial sector is the most vulnerable sector. The study attempts to examine the impact of stock market returns volatility on performance of banking sector in Pakistan. Two main hypotheses are constructed to achieve the objectives of study: i.e., (1) There exists a significant relationship between the returns volatility in stock market and the banking performance, and (2) Bank size has a significant role in establishing the volatility-performance relationship. Two step GMM system estimator is used to test these hypotheses. The results reveal that stock market volatility has a significant negative impact on return, equity, and the assets of banks; and, the bank-size has a significant negative impact on volatility-performance relationship. Specifically, the results suggest that during the time of high volatility, banks’ profitability starts to decline but this profitability decline is not same, for all size of banks. The negative impact of volatility for larger banks is high.
Key Words: Returns Volatility, GARCH, Banking Performance.