Tracing Return and Volatility Spillover Effect between Exchange Rate and Pakistan Stock Exchange Index

Abstract

The volatility spillover is broadly measured as the transmission of variability from one financial market to other markets. This study explores the spillover effect between the newly emerged index of the Pakistan stock exchange (PSX) and exchange rate by using the newly proposed alternative methodology by Ghouse et al. (2019) and GARCH model. Furthermore, the index under study is more concise in its composition than other readily used indices. The study finds shreds of evidence for the bidirectional spillover effect between PSX and exchange rate, which will be helpful for central policy makers and markets players in designing effective policy frameworks.
 Keywords: ARDL; GARCH; spillover effect

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“…The financial series are usually trendy; that is why it is not possible to get robust and unbiased results from these series without dealing with a trend (Ghouse and Khan 2017;Ghouse et al 2019;Ghouse et al 2021a). To tackle this issue, we applied the log difference of the financial series.…”