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Volatility Spillover between the Stock Market and the Foreign Market in Pakistan

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  • Abdul Qayyum

    (PIDE)

  • A. R. Kemal

Abstract

Our paper examines the volatility spillover between the stock market and the foreign exchange market in Pakistan. For the longrun relationship we use the Engle Granger two-step procedure and the volatility spillover is modelled through the bivariate EGARCH method. The estimated results from cointegration analysis show that there is no long-run relationship between the two markets. The results from the volatility modelling show that the behaviours of both the stock exchange and the foreign exchange markets are interlinked. The returns of one market are affected by the volatility of the other market. Particularly, the returns of the stock market are sensitive to the returns as well as the volatility of the foreign exchange market. On the other hand, returns in the foreign exchange market are mean-reverting, and they are affected by the volatility of stock market returns. There is a strong relationship between the volatility of the foreign exchange market and the volatility of returns in the stock market.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22216.

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Date of creation: Jan 2006
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Handle: RePEc:eab:financ:22216

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Keywords: Stock Market; Forex Market; EGARCH; Volatility Spillover; Stock Market Returns; Foreign Exchange Return; Pakistan;

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References

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  1. Henry, Olan T & Sharma, John, 1999. "Asymmetric Conditional Volatility and Firm Size: Evidence from Australian Equity Portfolios," Australian Economic Papers, Wiley Blackwell, vol. 38(4), pages 393-406, December.
  2. Rizwana Siddiqui & A. R. Kemal, 2006. "Remittances, Trade Liberalisation, and Poverty in Pakistan : The Role of Excluded Variables in Poverty Change Analysis," Development Economics Working Papers 22224, East Asian Bureau of Economic Research.
  3. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-44.
  4. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  5. Granger, Clive W.J. & Huang, Bwo-Nung & Yang, Chin W., 1998. "A Bivariate Causality between Stock Prices and Exchange Rates: Evidence from Recent Asia Flu," University of California at San Diego, Economics Working Paper Series qt9bk607p6, Department of Economics, UC San Diego.
  6. Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
  7. R. Smyth & M. Nandha, 2003. "Bivariate causality between exchange rates and stock prices in South Asia," Applied Economics Letters, Taylor & Francis Journals, vol. 10(11), pages 699-704.
  8. Braun, Phillip A & Nelson, Daniel B & Sunier, Alain M, 1995. " Good News, Bad News, Volatility, and Betas," Journal of Finance, American Finance Association, vol. 50(5), pages 1575-1603, December.
  9. Nieh, Chien-Chung & Lee, Cheng-Few, 2001. "Dynamic relationship between stock prices and exchange rates for G-7 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(4), pages 477-490.
  10. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-71, December.
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Cited by:
  1. Hunjra, Ahmed Imran & Azam, Muhammad & Niazi, Ghulam Shabbir Khan & Butt, Babar Zaheer & Rehman, Kashif-Ur- & Azam, Rauf i, 2010. "Risk and return relationship in stock market and commodity prices: a comprehensive study of Pakistani markets," MPRA Paper 40662, University Library of Munich, Germany.
  2. Abdul Qayyum & Idrees Khawaja & Asma Hyder, 2008. "Growth Diagnostics in Pakistan," Development Economics Working Papers 22218, East Asian Bureau of Economic Research.
  3. Stefanescu, Razvan & Dumitriu, Ramona, 2013. "Impact of the foreign exchange rates fluctuations on returns and volatility of the Bucharest Stock Exchange," MPRA Paper 47229, University Library of Munich, Germany, revised 04 Apr 2013.

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