The impact of COVID-19 pandemic on the stock market volatility in Pakistan: evidence from sectoral indices analysis

This paper aims to investigate the volatility and asymmetric behaviour across 13 sectors of the Pakistani economy during the COVID-19 pandemic. Using asymmetric GARCH models, including EGARCH and TGARCH, the study analysed daily time series returns data from 1 January 2016 to 30 December 2021. The sample period was divided into pre-COVID-19 and during COVID-19 sub-periods. The empirical findings revealed the presence of volatility clustering, leverage effect, and fat-tailed phenomena across all sectors, with increased asymmetric volatility during the pandemic compared to the pre-pandemic period. Negative returns dominated during the COVID-19 health crisis, indicating significant asymmetric transmissions. Both models confirmed high volatility persistence and asymmetric effects across all sectors during the pandemic. Consumer services, food and beverages, and telecom sectors emerged as key risk transmitters, while energy, financial, and consumer staples sectors acted as net recipients of volatility. Sectors with limited connections offer potential diversification benefits. The TGARCH model demonstrated superior fit over the EGARCH model. These findings provide valuable insights for investors, aiding in asset allocation decisions during market turbulence. Directional volatility patterns among sectors offer essential information for effective trading strategies, benefiting both investors and policymakers in portfolio construction and risk management amid potential crises in the Pakistani market.