The dynamics of Industrial Level Volatility Spillovers in Emerging Equity Market: Evidence from PSX

Abstract

The research study examines the return and volatility transmission from one industry to other industries listed on PSX. The research uses the daily data of average industrial stock returns of ten major industries from 2002 to 2021. Furthermore, ARMA (1,1) GARCH (1,1) model is used to check the spillover from one industry to other industries. Moreover, the time-varying nature of conditional correlation is further explored by using DCC-ADCC models for both aspects as well. The result of our study provides strong evidence of volatility transmission among various industries, but limited evidence is found regarding return spillover. The study finds the return and volatility spillover across various listed industries for the given time period which indicates the limited evidence of diversification. In addition, findings also reveal the time-varying nature of conditional correlation. The outcome of the various econometrics model reveals the presence of asymmetric behaviour among various industries. Market players may consider these market spillovers to effectively predict each other's future movement. The stock market may be an essential quality for multinational corporations interested in projecting exchange rates. Because of the spillover stock and foreign exchange markets, there are some fascinating implications for portfolio managers. This understanding would aid in the creation of a successful fund. Furthermore, the findings can assist regulators and policymakers in better understanding the market structure and designing policies.