Abstract:
This paper examines whether regional connectivity causes return and
volatility spillovers and the co-movement of stock exchanges to shift from
international to regional markets. Using the China-Pakistan free trade agreement
(FTA) of 2006 and the China-Pakistan Economic Corridor (CPEC) agreement to
represent events of regional connectivity, we test this proposition based on data for
two regional stock exchanges (the Pakistan Stock Exchange and Shenzhen Stock
Exchange) and two global markets (the FTSE 100 and Nasdaq). We divide the
convergence and co-integration of the stock markets into three phases: overall
sample (2001–17), pre-FTA and post-FTA, and pre-CPEC and post-CPEC.
Applying a GARCH (1, 1) model, co-integration, Granger causality and
seasonality, we find that regional connectivity causes return and volatility
spillovers and co-movements in the Pakistan Stock Exchange to shift from
international markets to regional markets.
