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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.

Suggested Citation

  • Abdul Qayyum & A. R. Kemal, 2006. "Volatility Spillover between the Stock Market and the Foreign Market in Pakistan," Finance Working Papers 22216, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:financ:22216
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    Cited by:

    1. Manish Kumar, 2011. "Return and volatility spillovers: evidence from Indian exchange rates," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 3(4), pages 371-387.
    2. Shahid Raza & M. Ali Kemal, 2017. "Daily Stock Market Movements: From the Lens of News and Events," PIDE-Working Papers 2017:146, Pakistan Institute of Development Economics.
    3. Abdul Qayyum & Idrees Khawaja & Asma Hyder, 2008. "Growth Diagnostics in Pakistan," PIDE-Working Papers 2008:47, Pakistan Institute of Development Economics.
    4. Bisharat Hussain Chang & Suresh Kumar Oad Rajput & Pervez Ahmed & Zafar Hayat, 2020. "Does Gold Act as a Hedge or a Safe Haven? Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(1), pages 69-80.
    5. 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.
    6. 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.
    7. Naurin, Abida & Qayyum, Abdul, 2016. "Impact of Oil Price and Its Volatility on CPI of Pakistan: Bivariate EGARCH Model," MPRA Paper 69774, University Library of Munich, Germany.
    8. Nadeem Ul Haque & Musleh-ud Din & Lubna Hasan, 2007. "Research at PIDE: Key Messages," PIDE Books, Pakistan Institute of Development Economics, number 2007:2.
    9. Muhammad Mansoor Baig & Waheed Aslam & Qaiser Malik & Muhammad Bilal, 2015. "Volatility of Stock Markets (an Analysis of South Asian and G8 Countries)," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(6), pages 58-70, December.
    10. Ghouse, Ghulam & Khan, Saud Ahmed & Arshad, Muhammad, 2015. "Time Varying Volatility Modeling of Pakistani and leading foreign stock markets," MPRA Paper 70080, University Library of Munich, Germany.
    11. Khalil Jebran & Amjad Iqbal, 2016. "Dynamics of volatility spillover between stock market and foreign exchange market: evidence from Asian Countries," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-20, December.
    12. Abbas, Qaisar & Khan, Sabeen & Shah, Syed Zulfiqar Ali, 2013. "Volatility transmission in regional Asian stock markets," Emerging Markets Review, Elsevier, vol. 16(C), pages 66-77.
    13. Muhammad Hanif & Abdullah Iqbal & Zulfiqar Shah, 2016. "Risk and Returns of Sharīʿah Compliant Stocks on the Karachi Stock Exchange – A CAPM and SCAPM Approach المخاطر والعوائد في مقطع عرضي من الأسهم المتوافقة مع الشريعة: اختبار متانة التطبيق وعيوب نموذج ت," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 29(2), pages 37-54, January.
    14. Abdul Qayyum & Muhammad Arshad Khan, 2014. "Dynamic Relationship and Volatility Spillover between the Stock Market and the Foreign Exchange Market in Pakistan: Evidence from VAR-EGARCH Modelling," PIDE-Working Papers 2014:103, Pakistan Institute of Development Economics.
    15. Abdul Jalil Khan & Parvez Azim & Shabib Haider Syed, 2014. "The Impact of Exchange Rate Volatility on Trade: A Panel Study on Pakistan’s Trading Partners," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(1), pages 31-66, Jan-June.
    16. Erick Lusekelo Mwambuli & Zhang Xianzhi & Zakayo S. Kisava, 2016. "Volatility Spillover Effects Between Stock Prices and Exchange Rates in Emerging Economies: Evidence from Turkey," Business and Economic Research, Macrothink Institute, vol. 6(2), pages 343-359, December.
    17. Naurin, Abida & Qayyum, Abdul, 2016. "Impact of Oil Price and Its Volatility on Stock Market Index in Pakistan: Bivariate EGARCH Model," MPRA Paper 70636, University Library of Munich, Germany.
    18. Lucía de las Nieves Morales, 2008. "Volatility Spillovers between Equity and Currency Markets: Evidence from Major Latin American Countries," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(132), pages 185-215.

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    More about this item

    Keywords

    Stock Market; Forex Market; EGARCH; Volatility Spillover; Stock Market Returns; Foreign Exchange Return; Pakistan;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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