Volatility Spillover Among Market Indices: Case of Pakistan Stock Exchange

Abstract

The study aims to investigate the return and volatility spillover of markets after the financial crisis’s year (2007-2008) and its widespread impact on other countries. The return and volatility spillover specific to two indices of Pakistan (KSE-30 and KSE-100) is of significance to corporations, portfolio management firms, mutual funds management firms and investors, as they invest over the benchmark - KSE-100 performance and they totally ignore KSE-30 index, which derives more than 50% of market capitalization. The results of the study provide insights about the manipulation of KSE-100 through KSE-30 by validating return and volatility spillover between the indices using daily data from 30th June 2009 to 31st December 2018, extracted through Karachi stocks and using financial econometrics models, GARCH, MGARCH, ARMA, Q statistics, and t-student distribution. The results generated using the aforementioned analysis conclude the presence of return spillover between KSE-30 and KSE-100 and no effect of volatility spillover from one index to another.