Exploring Asymmetric Linkages and Volatility Transmission between Stock Market and Foreign Exchange (FOREX)

Ghulam Mustafa (), Ather Azeem and Nadeem Ayub Bhutta
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Ghulam Mustafa: University of Central Punjab, Lahore, Pakistan.
Ather Azeem: University of Sialkot, Pakistan
Nadeem Ayub Bhutta: University of Central Punjab, Lahore, Pakistan

Audit and Accounting Review, 2023, vol. 3, issue 1, 1-18

Abstract: This study examines the direction and nature of volatility transmission between the stock market and the foreign exchange market (FOREX) of Pakistan. For this purpose, daily data is gathered to conduct the analysis for both markets. Stock market returns are measured by using the KSE-100 index and the daily Pakistan Rupee-PKR to the United States Dollar-USDexchange rate is used for the foreign exchange market. Noticeably, both the variables are stationary at their first difference. Normality is examined through Skewness and Kurtosis, Autocorrelation through Correlogram Q-statistics, and the ARCH effect through the ARCH-LM test. Volatility transmission between the two markets is examined by using bivariate diagonal BEKK-GARCH and bivariate E-GARCH models. The results of the study indicate that bi-directional volatility transmission exists between the stock market and the foreign exchange market (FOREX) of Pakistan. Results from the E-GARCH model further indicate that the nature of volatility transmission between these two markets is asymmetric, which means bad news of one market has a greater impact on the volatility of another market than the good news. Hence, the results of this study also indicate that past variances of the stock market and foreign exchange market has a significant effect on their own current volatility.

Keywords: asymmetric linkages; BEKK-GARCH; E-GARCH; Foreign Exchange Market (FOREX); volatility transmission (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2023
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