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

PIDE Working Paper No. 2006/7

18 Pages Posted: 19 Feb 2007

Date Written: 2006

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.

Keywords: Stock Market, Forex Market, EGARCH, Volatility Spillover, Stock market return, Foreign Exchange return, Pakistan

Suggested Citation

Qayyum, Abdul and Kemal, A. R., Volatility Spillover Between the Stock Market and the Foreign Exchange Market in Pakistan (2006). PIDE Working Paper No. 2006/7. Available at SSRN: https://ssrn.com/abstract=963308 or http://dx.doi.org/10.2139/ssrn.963308

A. R. Kemal

affiliation not provided to SSRN

No Address Available

No contact information is available for Abdul Qayyum

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