Exploring Volatility Spillover Dynamics between Emerging South Asian Stock Markets and the U.S. Market: Empirical Insights from the M-GARCH-BEKK Framework

Abstract

This study investigates the volatility spillover between emerging South Asian equity markets and developed U.S. market. Specifically, the study examines the entire sample period and three sub-periods: pre-crisis, crisis, and post-Global Financial Crisis (GFC) periods in the emerging markets of Pakistan, India, and Sri Lanka, as well as the U.S. as developed stock market. The study analyses both unidirectional and bidirectional shock and volatility spillover among the markets to determine the direction of risk transmissions. The analysis utilizes a multivariate GARCH-BEKK model. The results indicate that volatility transmissions increased due to the GFC. Furthermore, the South Asian emerging markets exhibit shock and volatility spillover during the crisis period compared to the pre- and post-crisis periods. Additionally, the patterns of risk transmission were time-varying. These findings support the notion that market volatility increases during turbulent events, such as the Global Financial Crisis. The implications of these results are important for policymakers, investors, and researchers interested in international diversification and market efficiency within the studied markets especially during turbulent periods.