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

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Author Info
Abdul Qayyum (Pakistan Institute of Development Economics, Islamabad)
A. R. Kemal (Formerly of the Pakistan Institute of Development Economics, Islamabad)

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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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File URL: http://www.pide.org.pk/pdf/Working%20Paper/PIDE%20Working%20Papers%202006-7.pdf
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Publisher Info
Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2006:7.

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Length: 15 pages.
Date of creation: 2006
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Handle: RePEc:pid:wpaper:2006:7

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

Find related papers by JEL classification:
G1 - Financial Economics - - General Financial Markets

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References listed on IDEAS
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    Other versions:
  3. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
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  7. Granger, Clive W. J. & Huangb, Bwo-Nung & Yang, Chin-Wei, 2000. "A bivariate causality between stock prices and exchange rates: evidence from recent Asianflu," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(3), pages 337-354. [Downloadable!] (restricted)
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  8. R. Smyth & M. Nandha, 2003. "Bivariate causality between exchange rates and stock prices in South Asia," Applied Economics Letters, Taylor and Francis Journals, vol. 10(11), pages 699-704, September. [Downloadable!] (restricted)
  9. Jeffrey A. Frankel, 1983. "Monetary and Portfolio-Balance Models of Exchange Rate Determination," NBER Reprints 0387, National Bureau of Economic Research, Inc.
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  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. [Downloadable!] (restricted)
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