Volatility Spillovers in Pakistani Financial Markets: Evidence of ARDL-GARCH Modeling
DOI:
https://doi.org/10.32350/jfar.81.03Keywords:
autoregressive distributed lag model-generalized autoregressive conditional heteroscedasticity model, financial markets, Pakistan, return and volatility transmissionAbstract
The research aimed to explore the lead-lag relationships among Pakistan Stock Exchange (PSX), Foreign Exchange (forex), and commodity markets in search of mean spillovers and volatility spillovers using Autoregressive Distributed Lag Model-Generalized Autoregressive Conditional Heteroscedasticity model (ARDL-GARCH) framework. The results highlighted that Pakistani financial markets coexist and there is stronger spillover between KSE-100 Index, PKR/USD exchange rate, and commodities including crude oil and gold prices. The joint system revealed the lead-indicator role of stock returns for currency and capital flow, while exchange rate shocks were found to significantly lag their influence on the stock market. Moreover, it demonstrated that gold price acts as hedge for currency depreciation and both exchange rate and gold exhibit clear linkage. The volatility spillovers are persistent and the asymmetric effects are most pronounced in stock and forex markets, where negative shocks create more volatility than positive shocks. Considerable research in this field in financial economics has been devoted to the effectiveness of stock market diversification. The analysis warned that maintaining an eye on these interconnections is critical in containing systemic risks during times of market stress.
Keywords: Volatility of Spillovers; Financial Markets; ARDL-GARCH; and Timeseries Data
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