Tracing dynamic linkages and spillover effect between Pakistani and leading foreign stock markets

Ghulam Ghouse · Saud Khan

15 citations0/0 files storedReview of Financial Economics

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Financial Risk and Volatility Modeling Global Financial Crisis and Policies Market Dynamics and Volatility

Abstract

Abstract This study traces the degree of integration and volatility spillover effect between the Pakistani and leading foreign stock markets by analyzing the Meteor shower hypothesis. Daily data are used from nine worldly equity markets (KSE 100, NIKKEI 225, HIS, S&P 500, NASDAQ 100, DOW JONES, GADXI, FTSE 350 and DFMGI) for the period of 2005 to 2014. First, we used the whole data set and after that we split data set into two subsets, First subset of data contains the era of global financial crisis of 2008 from 2005 to 2009 and Second subset is after global financial crisis time period from 2010 to 2014 (The global crisis prevailed till end of 2009). By following the Hamao et al. (1990) technique the univariate GARCH type models are employed to explore the dynamic linkages between Pakistani and leading foreign stock markets. The results from whole data set illustrate that there is mixed co‐movements between leading foreign stock markets and Pakistani stock market. The results from both subsets provide an evidence that there is a unidirectional mean and volatility spillover effect from S&P 500, NASDAQ 100, DJI and DFMGI to KSE 100. Also we found bidirectional spillover effect between DFMGI and KSE 100 from both subsets of data. We concluded that there is only one indirect linkage through which may the information transmitted to KSE 100. This linkage is developed due to the co‐movement among KSE 100, DFMGI and NASDAQ 100 in crisis period. This integration between these markets may provide a sign of indirect linkage. It also exhibits the volatility in Pakistan stock market returns is instigated through direct effects as well as indirect effects. Our study brings important conclusions for financial institutions, portfolio managers, market players and academician to diagnose the nature and level of linkages between the financial markets.

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References

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