Dynamics of Price and Volatility Spillovers among Stock Markets and Foreign Exchange Markets: Evidence from South Asia

Abstract

This study examines the volatility spillover interplay between the foreign exchange and equity markets in three key South Asian countries: India, Pakistan, and Sri Lanka. Drawing on time-series data from 2001 to 2023 and utilizing the DCC-GARCH model, distinct market dynamics emerge. India stands out with pronounced short-term and long-term bidirectional spillovers, revealing an integrated financial landscape. Conversely, Pakistan demonstrates heightened sensitivity to short-term market shocks with muted long-term correlations. Sri Lanka's financial landscape reveals an absence of short-term spillovers while manifesting pronounced long-term interdependencies. This study underscores South Asia's financial heterogeneity, offering pivotal insights for regional economic strategies, investment paradigms, and future academic studies.