Abstract
This study examines the volatility transmission between the currency market and the stock market of Pakistan in the presence of structural breaks. For this purpose, daily data from the stock market and currency market is analyzed. An empirical investigation is conducted using the bivariate EGARCH model and the test for multiple structural breaks developed by Bai and Perron (2003). This study analyses these markets with the inclusion of sudden changes. Results of the EGARCH model suggest that volatility spillover is positive and bidirectional between these markets of Pakistan.
Highlights
Over the last few decades, volatility in financial markets has been the subject matter of many researches in the world
Mobeen integrated and interdependent financial markets, explicit linkages always exist among the volatility of markets
Literature highlights that the EGARCH model is more advantageous than other members of ARCH/GARCH family models when the objective is to analyze volatility spillover assuming Constant Conditional Correlation (CCC)
Summary
Over the last few decades, volatility in financial markets has been the subject matter of many researches in the world. Increasing integration among major financial markets has brought the attention and focus of academics, researchers, and policymakers towards volatility modeling and analyzing the volatility transmission mechanism among major international financial markets. Due to globalization and the financial liberalization of world markets, the volatility of a certain market may lead to instability or uncertainty in other related markets. This is referred to as volatility spillover (Mishra et al 2010). Facts and figures of volatility and volatility spillover among financial markets provide a huge help for making economic and financial decisions
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