Pakistan Institute of Development Economics



Volatility Modelling and Dynamic Linkages between Pakistani and Leading Foreign Stock Markets: A Multivariate GARCH Analysis

It is essential for financial institutions and academicians to understand volatility spillover and financial market returns. However, previous studies examined the effects of direct spillover only and ignored those of the newly emerging stock markets. Therefore, this study attempts to estimate the time-varying volatility of Pakistani and leading foreign stock markets. It also tries to explore the direct and indirect volatility spillover effect between Pakistani and eight leading foreign stock markets. Daily data were used from nine international equity markets (KSE 100, NIKKEI 225, HIS, S&P 500, NASDAQ 100, DOW JONES, GADXI, FTSE 350 and DFMGI) for the period between 2005 and 2016. The univariate GARCH and GJR models were employed for analysing volatility, and the multivariate GARCH Diagonal BEKK model was used to explore direct and indirect volatility spillover effects. In order to analyse the volatility spillover effect during and after the global financial crisis period, the data were categorised into two periods: between 2005 and 2009 and between 2010 and 2016. The Chow break-point test was also employed to identify structural breaks in return series due to global financial crises. Direct and indirect spillover effects were found between KSE100, S&P 500, NASDAQ 100, DOW JONES and DFMGI. Keywords: Volatility, Spillover, Equity Market, Financial Crisis and GARCH

Ghulam Ghouse,

Saud Ahmed Khan,

Muhammad Arshad.