A Study on Volatility Dynamics and Inter-Sectoral Spillovers Originating from Banking Sector: The Case of Karachi Stock Exchange

Abstract

The study was conducted to investigate the spillover effects originating from the Banking sector and directionality of these effects on various sectors of Pakistan. The sectors under study were Banks, Oil and Gas, Construction, Chemical, Food Producer, Fixed Line Telecommunication, Electricity sector and Personal Goods sector. Daily data of 251 companies was considered and the time period studied was from 2008 to 2012. We investigated the spillover effects originating from Banking sector and whether they differ across different sector but also examined whether correlation of Banking sector with other sector varies over time. We used BEKK parameterization as used by  (Engle & Kroner, 1995) to detect volatiltity transmission among Banking and all other sectors. We also conducted Granger Causality test on weekly portfolio returns, volatility and conditional standard deviation to have a better understanding. The results of daily data showed returns of banking sector significantly impacted returns in Oil and Gas sector, Chemical and Electricity Sector Returns in Construction and Chemical sector impacted return in banking sector. We tested Granger Causality, on weekly portfolio returns, volatility and conditional standard deviation and then ran the GARCH model on weekly and monthly data set. We concluded that banking sector did play a crucial role in impacting various sectors of the economy but it was also evident from the results that few sectors did impact the Banking sector too.

Keywords: Volatility, GARCH Model, Portfolio returns, Banking Sector