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Volatility Spillover Between the Stock Market and the Foreign Exchange Market in Pakistan

Author

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  • Qayyum, Abdul
  • Kemal, A. R.

Abstract

Our paper examines the volatility spillover between the stock market and the foreign exchange market in Pakistan. For long run relationship we use Engle Granger two step procedure and the volatility spillover is modelled through 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 behaviour of both the stock exchange and the foreign exchange markets are interlinked. The returns of one market are affected by the volatility of other market. Particularly the returns of the stock market are sensitive to the returns as well as the volatility of 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 strong relationship between the volatility of foreign exchange market and the volatility of returns in stock market.

Suggested Citation

  • Qayyum, Abdul & Kemal, A. R., 2006. "Volatility Spillover Between the Stock Market and the Foreign Exchange Market in Pakistan," MPRA Paper 1715, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:1715
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    File URL: https://mpra.ub.uni-muenchen.de/1715/1/MPRA_paper_1715.pdf
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    References listed on IDEAS

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    1. 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 1057-1072, June.
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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," Working Papers id:12188, eSocialSciences.
    3. Abdul Qayyum & Idrees Khawaja & Asma Hyder, 2008. "Growth Diagnostics in Pakistan," PIDE-Working Papers 2008:47, Pakistan Institute of Development Economics.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.

    More about this item

    Keywords

    Stock Market; Forex Market; EGARCH; Volatility Spillover; Stock market return; Foreign Exchange return; Pakistan;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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