Abstract:
This article examines the dynamic linkages between Pakistan’s emerging
stock market and (i) the US market and (ii) the regional markets of India and Japan.
Using data for the daily returns and volatility spillovers of three market pairs
(Pakistan-US, Pakistan-Japan and Pakistan-India), the study estimates a series of
bivariate asymmetric VARMA(1,1)-GARCH(1,1) models. It also fits multivariate
asymmetric VARMA(1,1)-GARCH(1,1) models for two groups of markets:
Pakistan-India-US and Pakistan-India-Japan. Based on the mean spillovers, the
results suggest that the global and regional equity markets (Granger) cause the
Pakistani market. There are unidirectional volatility spillovers to Pakistan from
the US and Japan, while India is the only regional market with a significant crossasymmetric
effect on Pakistan. In the multivariate case, the regional and global
markets have significant joint mean and variance spillovers and asymmetric effects
on the Pakistani market. This indicates a weak degree of integration between the
Pakistani market and the global and regional markets, implying that local risk
factors – either firm-specific or country-specific – explain the expected returns on
investment in the Pakistani stock market.
