Volatility Spillovers Across Global Financial Markets

Abstract

Volatility spillovers across global financial markets represent the transmission of market shocks, investor sentiment, and financial distress from one market to another. These spillovers can result in significant market disruptions and impact portfolio diversification strategies. This paper examines the nature and extent of volatility spillovers between developed and emerging financial markets, focusing on the Pakistan Stock Exchange (PSX) and major international markets (U.S., European, and Asian markets) between 2010 and 2024. Using multivariate GARCH models, the study identifies the magnitude of volatility spillovers and analyzes their influence on market stability, investor behavior, and risk management strategies. The results indicate strong bidirectional spillovers between Pakistan’s financial markets and global markets, with increased sensitivity during periods of economic uncertainty and financial crises. The paper concludes with policy recommendations for mitigating the adverse effects of volatility spillovers, including improving market liquidity, enhancing risk management frameworks, and strengthening financial regulation.