MODELLING THE LINKAGES OF PAKISTAN STOCK MARKET WITH INTERNATIONAL STOCK MARKETS

Abstract

This study explores the linkages between emerging equity market of Pakistan with global equity market of USA and regional developing market of China and regional developed market of Japan. The linages are dynamic in nature; however asymmetric bivariate VARMA (1, 1) – GARCH (1, 1) model is used to determine the mean returns spillover and volatility spillover for three pairs of market (Pakistan – US, Pakistan – China and Pakistan – Japan) respectively. The impact of CPEC announcement is also determined by using Dummy in the model. However, multivariate asymmetric VARMA (1, 1) – GARCH (1, 1) with an extension of BEKK model is used to determine the multivariate linkages between two groups with three pairs of markets (Pakistan – China – US) and (Pakistan – China – Japan) respectively. While seized into deliberation the mean spillovers, the results of the study suggests that equity market of Pakistan is influenced by the past day returns and the unanticipated positive shocks from the global market of USA and regional developed market of Japan, while the equity market of china does not granger cause equity market of Pakistan. Thus, there is an existence of unidirectional return spillover from regional and global market obliging the equity market of Pakistan except for china. Interestingly, the magnitude of return spillover is more in case of own spillover as compared to cross market spillover. The volatility persistence of equity market of Pakistan is high and unidirectional volatility spillover from markets of China and USA and interestingly Pakistan has unidirectional volatility towards USA and China. However, global volatility shocks have less magnitude than own market spillover for the equity market of Pakistan. In multivariate case, the joint mean and variance spillover has significant effect on the global and regional equity markets. The results of the study shows the weak integration among the markets and implying the fact that expected returns on investment in Pakistan equity market is influenced by either by specifically firm or country specific factors.