Volatility Spillover between the Stock Market and the Foreign Market in Pakistan

Abdul Qayyum and Abdul Razzaq Kemal

Finance Working Papers from East Asian Bureau of Economic Research

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.

Keywords: Stock Market; Forex Market; EGARCH; Volatility Spillover; Stock Market Returns; Foreign Exchange Return; Pakistan (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2006-01
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Citations: View citations in EconPapers (21)

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Working Paper: Volatility Spillover between the Stock Market and the Foreign Market in Pakistan (2006)
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