Studying the Volatility of Pakistan Stock Exchange and Shanghai Stock Exchange Markets in the Light of CPEC: An Application of GARCH and EGARCH Modelling

Abstract

Globalization in the new millennium has brought a set of profound social, economic and political changes in the world. Pakistan and her neighboring country China have joined hands and has initiated China-Pakistan Economic Corridor (CPEC) which is an ambitious project that focuses on improving connectivity and cooperation among both the neighboring giants. The growing nexus between China and Pakistan through CPEC is going to strengthen their markets as well stock markets. Ultimately both the economies are bound to benefit consequently resulting in increased GDP of both the countries. In this piece of research, we have studied the impact of CPEC on Pakistan Stock Market (PSX) and SSE by employing GARCH and EGARCH model from January 2011 to March 2019 on daily basis which shows recent purchases of up to 45% of Pakistani shares owned by China. Empirical analysis shows that in PSX risk parameter is little bit higher in post-CPEC comparatively pre-CPEC period. Volatility of SSE has high in both pre and post-CPEC period as compared to PSX. It reveals that PSX market after the advent of CPEC is showing stability which is a sign of encouragement for businessmen, traders and investors to invest. Market stability has increased manifold and the findings are supported by Morgan Stanley Capital International (MSCI). Recently Bloomberg has ranked Pakistan amongst the first 5 best performing stocks around the world. The research findings show PSX has a high potential for growth and is expected to become a lucrative market for businessmen, traders and investors.