ASYMMETRIC AND VOLATILITY SPILLOVER EFFECTS BETWEEN GOLD, EXCHANGE RATE AND SECTORAL STOCK RETURNS IN PAKISTAN
Keywords:
Threshold GARCH, Volatility Contagion, Asymmetric Effect, Exchange Rate, Gold PricesAbstract
In this paper, the asymmetric and spillover effects among gold, exchange rate, and sectoral stock returns of Pakistan have been examined. Using the Threshold GARCH model, we found that the volatilities in both gold and exchange rate transmit to each sectoral stock return in the overall sample period. The variations in gold returns lead to variation in the exchange rate and contrariwise. The gold and exchange rate spillover effect on sectoral stock returns is notably higher in times of pre-Asian financial crisis than other sub-periods along with the bidirectional mechanism of volatility contagion between gold and exchange rate. Further, the asymmetric response of most sectoral returns to shocks and a switch in direction of volatilities through the postglobal crisis as compared to pre-crisis periods have also been noted. Our findings provide frail evidence on volatility spread between gold and exchange rate in the course of post-global financial crisis phase. These findings have important implications for portfolio managers and institutional investors.References
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Evidence and Forecasts. The Journal of Business, 62(1), 55-80.
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gold and oil prices on BIST 100 Index. Mediterranean Journal
of Social Sciences, 4(10), 726.
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from Canada. Review of Financial Economics, 23(1), 18-29.
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stock markets and the macroeconomic environment: a FAVAR
model approach. Applied Financial Economics, 24(10), 691-703.
Awan, M. Z., Khan, B., & uz Zaman, K. (2011). Economic determinants
of foreign direct investment (FDI) in commodity producing
sector: A case study of Pakistan. African Journal of Business
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volatility indices. Journal of Futures Markets, 33(6), 555-572.
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finance: A review of the theory and empirical evidence. Journal
of Econometrics, 52(1-2), 5-59.
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market: Evidence from implied volatility indices. Resources
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international market. International Business and Global
Economy, 2016 (1), 402413.
Butt, B. Z., ur Rehman, K., Khan, M. A., & Safwan, N. (2010). Do economic
factors influence stock returns? A firm and industry level analysis.
African Journal of Business Management, 4(5), 583-593.
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prices and exchange rates: Evidence from the banking crisis of 2007–
2010. International Review of Financial Analysis, 33, 87-103.
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trends and governmental responses to the 2008 crisis.
International Journal of Housing Policy, 10(2), 191-208.
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Tech and non-tech spillovers in the United States and Asia. Journal
of Multinational Financial Management, 13(4-5), 303-322.
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exchange pricing puzzle: Evidence from a small open economy.
Pacific-Basin Finance Journal, 12(1), 41-64.
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returns in a regime-switching environment: Evidence for BRICS
countries. Research in International Business and Finance, 31, 46-56.
Chou, D.-W., Lin, L., Hung, P.-H., & Lin, C. H. (2017). A revisit to
economic exposure of US multinational corporations. The North
American Journal of Economics and Finance, 39, 273-287.
Christie, A. A. (1982). The stochastic behavior of common stock
variances: Value, leverage and interest rate effects. Journal of
Financial Economics, 10(4), 407-432.
Christner, R., Dicle, M. F., & Levendis, J. (2013). A Test of Hedging Alternatives
for the US Currency and the US Stock Market. Retrieved from
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1953571
Chua, J. H., Sick, G., & Woodward, R. S. (1990). Diversifying with gold
stocks. Financial Analysts Journal, 46(4), 76-79.
Ciner, C., Gurdgiev, C., & Lucey, B. M. (2013). Hedges and safe havens:
An examination of stocks, bonds, gold, oil and exchange rates.
International Review of Financial Analysis, 29, 202-211.
Do, G. Q., Mcaleer, M., & Sriboonchitta, S. (2009). Effects of international
gold market on stock exchange volatility: evidence from ASEAN
emerging stock markets. Economics Bulletin, 29(2), 599-610.
Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with
estimates of the variance of United Kingdom inflation.
Econometrica: Journal of the Econometric Society, 50(4), 987-1007.
Fahami, N. A., Haris, S., & Mutalib, H. (2014). An Econometric Analysis
between Commodities and Financial Variables: The Case of
Southeast Asia Countries. International Journal of Business and
Social Science, 5(7), 216-223.
Fama, E. F. (1965). The behavior of stock-market prices. The Journal of
Business, 38(1), 34-105.
Fung, A. K.-W., Mok, D. M., & Lam, K. (2000). Intraday price reversals
for index futures in the US and Hong Kong. Journal of Banking
& Finance, 24(7), 1179-1201.
Ghazali, M. F., & Lean, H. H. (2015). Asymmetric volatility of local gold
prices in Malaysia. In Econometrics of Risk (pp. 203-218).
Springer, Cham.
Gil-Alana, L. A., Yaya, O. S., & Awe, O. O. (2017). Time series analysis
of co-movements in the prices of gold and oil: Fractional
cointegration approach. Resources Policy, 53(C), 117-124.
Girard, E., & Biswas, R. (2007). Trading volume and market volatility:
Developed versus emerging stock markets. Financial Review,
42(3), 429-459.
Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation
between the expected value and the volatility of the nominal
excess return on stocks. The journal of finance, 48(5), 1779-1801.
Hillier, D., Draper, P., & Faff, R. (2006). Do precious metals shine? An
investment perspective. Financial Analysts Journal, 62(2), 98-106.
Hood, M., & Malik, F. (2013). Is gold the best hedge and a safe haven
under changing stock market volatility? Review of Financial
Economics, 22(2), 47-52.
Hughes, M. P., Smith, S. D., & Winters, D. B. (2007). An empirical
examination of intraday volatility in on-the-run US Treasury
bills. Journal of Economics and Business, 59(6), 487-499.
Inci, A. C., & Lee, B. S. (2014). Dynamic relations between stock returns
and exchange rate changes. European Financial Management,
20(1), 71-106.
Ingalhalli, V., & Reddy, Y. (2016). A study on dynamic relationship
between oil, gold, forex and stock markets in Indian context.
Paradigm, 20(1), 83-91.
Ismail, Z., Yahya, A., & Shabri, A. (2009). Forecasting gold prices using
multiple linear regression method. American Journal of Applied
Sciences, 6(8), 1509.
Jaffe, J. F. (1989). Gold and gold stocks as investments for institutional
portfolios. Financial Analysts Journal, 45(2), 53-59.
Jain, A., & Biswal, P. (2016). Dynamic linkages among oil price, gold price,
exchange rate, and stock market in India. Resources Policy, 49, 179-185.
Jaleel, F. M., & Samarakoon, L. P. (2009). Stock market liberalization and
return volatility: Evidence from the emerging market of Sri Lanka.
Journal of Multinational Financial Management, 19(5), 409-423.
Khan, H. H., Ahmad, R. B., & Gee, C. S. (2016). Bank competition and monetary
policy transmission through the bank lending channel: Evidence from
ASEAN. International Review of Economics & Finance, 44, 19-39.
Khan, M. M. A. (2013). Forecasting of gold prices (Box Jenkins
approach). International Journal of Emerging Technology and
Advanced Engineering, 3(3), 662-670.
Kim, K. H. (2003). Dollar exchange rate and stock price: evidence from
multivariate cointegration and error correction model. Review of
Financial Economics, 12(3), 301-313.
Kiohos, A., & Sariannidis, N. (2010). Determinants of the asymmetric gold
market. Investment Management and Financial Innovations,
7(4), 26-33.
Kurihara, Y., & Nezu, E. (2006). Recent stock price relationships between
Japanese and US stock markets. Studies in Economics and
Finance, 23(3), 211-226.
Kyle, A. S. (1985). Continuous auctions and insider trading. Econometrica:
Journal of the Econometric Society, 53(6),1315-1335.
Lawrence, C. (2003). Why is gold different from other assets? An
empirical investigation. London, UK: The World Gold Council.
Lean, H. H., & Wong, W.-K. (2015). Is gold good for portfolio
diversification? A stochastic dominance analysis of the Paris stock
exchange. International Review of Financial Analysis, 42, 98-108.
Liao, S. J., & Chen, J. T. (2008). The relationship among oil prices, gold
prices and the individual industrial sub-indices in Taiwan. In Int.
Conf. Bus. Inf. Seoul, South Korea.
Liow, K. H. (2015). Volatility spillover dynamics and relationship across
G7 financial markets. The North American Journal of Economics
and Finance, 33, 328-365.
Liu, Y. A., & Pan, M. S. (1997). Mean and Volatility Spillover Effects in
the US and Pacific–Basin Stock Markets. Multinational Finance
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