Dynamic Relationship and Volatility Spillover Between the Stock Market and the Foreign Exchange market in Pakistan: Evidence from VAR-EGARCH Modelling

Transcription

1 Dynamc Relaonshp and Volaly pllover Beween he ock Marke and he Foregn xchange marke n Paksan: vdence from VAR-GARCH Modellng Dr. Abdul Qayyum Dr. Muhammad Arshad Khan

2 Inroducon A volale sock and exchange markes of a counry adversely affec nvesmen and hence economc growh. Reasons: Volaly ncreases rsk o nvesors and hey reduce her posons. Increases uncerany and reduce profably. Counres ha are lnked hrough rade and nvesmen may dsruped hrough spllover effecs. Invesors whdrew capal. exchange rae volaly affecs: frm s compeveness earnngs cos of funds sock prces.

3 Theorecal Lnk beween he ock and Forex Markes Connecons beween sock and forex marke can be raced hrough sandard rade heory: Flow-orened xchange Rae Models: xchange rae movemens nfluences nernaonal compeveness and rade balance whch n urn nfluences real ncome. ock prces reac o exchange rae changes and effecs consumpon and nvesmen decsons. shocks n he sock marke mpacs aggregae demand hrough: Wealh and lqudy effecs Money demand and xchange raes

4 Con ock-orened xchange Rae Models: Treaed capal accoun as sgnfcan deermnans of exchange rae dynamcs. Under hese models value of fnancal asses are deermned by: PV of fuure cash flow xpecaons abou he movemens n fnancal asse prces. xchange rae volaly may affec sock prces whch may affec nvesors nvesmen decsons.

5 Movaon Gven he mporan role of exchange rae volaly and sock marke volaly n consumpon and nvesmen decsons he presen sudy examnes he dynamc lnkages beween sock marke and Forex marke n he conex of Paksan. Parcularly he sudy focuses on he naure and drecon of volaly ransmsson beween sock marke and Forex marke usng weekly daa from 02 July 997 o 04 July 202. The sudy also addresses he queson wheher spllover effec s asymmerc?

6 Mehodology We consder he followng VAR-GARCH (p q) condonal mean models: Where s sock prce reurns and s exchange rae reurns ec - s error correcon erm and ᵋ s are error erms s p e p s s ec 0 p p ec 0 )] ( [0 ~ 2 N )] ( [0 ~ 2 N

7 Con. The condonal varance models of sock reurns and exchange rae reurns are specfed as follows: ) ( j ps j j s Ln Ln ) ( j ps j j Ln Ln

8 mprcal Resuls

9 Con.. Volaly cluserng can be seen by he followng Fg.

10 Con.. The presence of volaly cluserng could be due o: Increase n neres rae Increase n dvdend yelds Ol prces margn requremen nformaon paerns Parcpan s expecaons ec.

11 Con Before esmang he GARCH model frs we deermne he conegraon beween P and R.

12 Con

13 Con.. xchange rae reurns and sock reurns are negavely correlaed. The coeffcen of exchange rae reurn (.e.-0.46) s larger han ha of sock reurns (.e. -0.0). Ths resul mples ha decrease n sock reurns reduces domesc wealh whch leads o decrease n money demand and neres raes. Decrease n sock reurns leads foregn nvesors o decrease n demand for asses and domesc currency. Ths shf n currency demand and supply of currences causes capal ouflow and deprecaes domesc currency. Deprecaon of Pak-rupee exchange rae drags down sock prces whch may nduce bearsh sock marke.

14 Con xchange rae changes have negave effec on sock reurns due o s nflaonary effecs whch dscourages nvesors o ncrease her asse porfolos hus dscouragng sock marke. We also obaned prce spllover from sock marke o forex marke. Movemens of sock reurns produces adverse effecs on forex marke whch end o fuel nflaonary expecaons. Increase n nflaon exers downward pressure on Pak-rupee whch n urn produces negave effec on sock reurns. Thus here exss wo-way prce spllovers

15 Con.. Condonal varance equaon also suppors wo-way prce spllovers. The magnude of spllovers from forex marke o sock marke s larger (.e ) han ha of from forex marke o sock marke (.e. -0.9). Ths mples ha exchange rae volaly s posvely relaed o sock reurns whereas sock reurns volaly s negavely relaed o exchange rae changes. Ths mples ha movemens n exchange rae causes n movemens n sock reurns. Volaly perssence erms are posve and sgnfcan for boh reurns wh less uny coeffcens. News abou he volaly has asymmerc mpacs on boh reurns

16 Conclusons No conegraon exss beween sock prces and forex rae. ock and forex markes are nerdependen wh woway prce spllovers. Reurns of one marke are affeced by he volaly of oher marke. ock reurns are more sensve o he volaly of forex marke. xchange rae movemens are also affeced by he volaly of sock reurns.

17 Con. Therefore BP could monor he adverse mpac of exchange rae and sock prce varaons on prvae and porfolo nvesmen. There s need o desgn a polcy ha mnmes he adverse affecs on exchange rae and sock prce volales on nvesmen decsons ably of sock and forex markes s mporan o guaranee foregn drec and porfolo nvesmen whch generaes posve mpacs on economc growh and macroeconomc sably.

18 Thank You