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Dynamic Relationship and Volatility Spillover between the Stock Market and the Foreign Exchange Market in Pakistan: Evidence from VAR-EGARCH Modelling

Author

Listed:
  • Abdul Qayyum

    (Pakistan Institute of Development Economics, Islamabad)

  • Muhammad Arshad Khan

    (COMSATS Institute of Information Technology, Islamabad)

Abstract

The paper examines the dynamic relationship and volatility spillovers between the stock market and the foreign exchange market in Pakistan using weekly data from 02 July, 1997 to 04 July 2012. We have used Johansen cointegration test to determine long run relationship between stock price index and exchange rate. The result lends no support for the presence of long-run relationship between the stock price index and exchange rate. Furthermore, volatility spillover is modelled through bivariate EGARCH framework. The result from the EGARCH models reveals two-way volatility spillovers. The returns of one market are affected by the volatility of other market. Particularly, the returns of the stock market are more sensitive to the exchange rate returns as well as the volatility of foreign exchange market. Furthermore, the returns in the foreign exchange market are also affected by the stock market returns and the volatility of stock market returns. Overall, the results suggest that there is strong link between the volatility of foreign exchange market and the volatility of returns in stock market in Pakistan.

Suggested Citation

  • 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.
    • Handle: RePEc:pid:wpaper:2014:103
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    References listed on IDEAS

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    Cited by:

    1. 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.

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    More about this item

    Keywords

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

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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