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

Ghulam Ghouse, Saud Ahmed Khan, Muhammad Arshad


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

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DOI: https://doi.org/10.30541/v58i3pp.265-282


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