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

• Author: Saud Ahmed Khan,Ghulam Ghouse
• Date: 01 November 2017
• DOI: http://doi.org/10.1016/j.rfe.2017.08.001
• Published date: 01 November 2017

Tracing dynamic linkages and spillover effect between Pakistani and

leading foreign stock markets

Ghulam Ghouse ⁎, Saud Ahmed Khan

PakistanInstitute of DevelopmentEconomics, Islamabad,Pakistan

abstractarticle info

Articlehistory:

Received12 March 2016

Receivedin revised form 31 July 2017

Accepted14 August 2017

Availableonline 17 August 2017

Thisstudy traces the degreeof integration and volatilityspillovereffect between the Pakistaniand leading foreign

stockmarkets by analyzingthe Meteor shower hypothesis.Daily dataare used from nine worldlyequity markets

(KSE 100, NIKKEI225, HIS, S&P 500, NASDAQ 100, DOW JONES, GADXI, FTSE350 and DFMGI) for the period of

2005 to 2014. First,we used the whole data set and after that we split data setinto two subsets, First subset of

datacontains the era of globalfinancial crisis of 2008from 2005 to 2009 and Second subsetis after global financial

crisis timeperiod from 2010 to 2014 (The global crisisprevailed till end of 2009). By followingthe Hamao et al.

(1990)technique the univariateGARCH type models are employedto explore the dynamiclinkages between Pa-

kistaniand leading foreignstock markets. The resultsfrom whole dataset illustrate that thereis mixed co-move-

ments betweenleading foreignstock markets and Pakistanistock market. The resultsfrom both subsets provide

an evidencethat there is a unidirectional meanand volatility spillovereffect from S&P 500,NASDAQ 100, DJI and

DFMGIto KSE 100. Also we foundbidirectional spillovereffect between DFMGIand KSE 100 from bothsubsets of

data.We concluded that thereis only one indirect linkagethrough which may theinformation transmittedto KSE

100.This linkage is developeddue to the co-movementamong KSE 100, DFMGIand NASDAQ 100 in crisisperiod.

Thisintegration betweenthese markets may providea sign of indirect linkage.It also exhibitsthe volatility in Pa-

kistanstock market returnsis instigated through directeffects as well as indirecteffects. Our study bringsimpor-

tant conclusionsfor financial institutions, portfoliomanagers, market players and academicianto diagnose the

nature and levelof linkages between the financialmarkets.

© 2017 Elsevier Inc. All rights reserved.

Keywords:

Volatility

Equitymarket

Spillover

GARCHand GJR

1. Introduction

Modern econometric tools are used for investigating volatility co-

movementbetween the financial markets.The global financial integra-

tion started in the mid-1980s,consequently risk and return Co-move-

ments between the financial markets were observedat that time. The

growing economic integration of intercontin ental financial markets

has gotten significance since last three decades.The major factors be-

hind this observed globalization are extensive growth of technology,

easy capital flow and financial links betw een the economies. That is

why the analysis of the natureand level of linkages between different

financial markets is significant for financial institutes, portfolio man-

agersand market players. Engle,Ito, and Lin (1990) proposedthe mete-

or shower hypothesis to trace out intr a-market co-movements. The

global financial crisis of 2008 was one of the worst financial crises of

US history.It not only triggered imbalancesin US economy but also im-

pacteda majorpart of overall globaleconomy. Most of the globalfinan-

cial crises initiated from US ec onomy and due to the strong

interdependence of US economywith other economiesthese crises im-

pactedall integrated economiesat some extent. The key reasonsidenti-

fied by the academic researchers behind this cris is were excessively

relaxed monetary policy, regulatory failures in macro prudential and

micro prudentiallevels, the accumulationof global balance of payment

inequalities and flaws in the international financial planning (Kawai,

Lamberte,& Park, 2012).

Owing to investment linkages withUS economy the effect of finan-

cial crisis transmitted into Pa kistan (Amjad & Din, 2010) and Dubai

economy (Onour, 2010). Likewise, Dubai financialmarket had also im-

pressivelyimpactedDubai's economic growth.The portfolioinvestment

in Dubaifinancial market reduced24% in 2009. When financial crisisef-

fect transmittedinto Pakistan economy, the economywas facing some

internal issues like political instability, bad governance, deficit in cur-

rent account,rising unemployment, energycrisis and failure of macro-

economic policies. Pakistan and Dubai both countrieshave significant

relationship in different sectors of economy. Dubai is one of the emerg-

ing marketsof UAE. Over 1.2 millionemigrants of Pakistanare providing

their services in UAE. Their remit tances significantly contrib ute to

Pakistan'sforeign reserve.UAE is the second prominentsource of remit-

tances from Pakistani emigrants. Pakistan expatriates provided $2.52

Reviewof Financial Economics 35 (2017)29–42

⁎Correspondingauthor.

E-mailaddress: ghulamghouse_15@pide.edu.pk(G. Ghouse).

http://dx.doi.org/10.1016/j.rfe.2017.08.001

1058-3300/©2017 Elsevier Inc. All rightsreserved.

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe