Regime changes in an emerging financial market – Pakistan

Safia Minhaj, Department of Economics, University of Karachi
Mohammed Nishat, Professor of Economics and Finance, Institute of Business Administration, Karachi

Abstract/Description

This study empirically explores the sensitivity of Pakistani collective investment undertakings’ returns to changes in equity, fixed income and foreign exchange market returns. The stochastic regime switching model is employed to capture the mutual tendency of sudden changes in the behavior of financial variables which prevails a long time after these changes and their impact on equilibrium asset prices. The study uses the monthly data of financial variables from January 2000 to October 2019 for Pakistan. The results show very strong evidence of regime-switching performance in the equity, bond and foreign exchange market returns. Excess return remains negative in both the States however, the values of forward premiums are positive which infers that the local currency returns in Pakistan are quite smaller and uncertain as compared to the return on foreign currency (US Dollar) holding.

 
Apr 2nd, 2:30 PM Apr 2nd, 4:00 PM

Regime changes in an emerging financial market – Pakistan

This study empirically explores the sensitivity of Pakistani collective investment undertakings’ returns to changes in equity, fixed income and foreign exchange market returns. The stochastic regime switching model is employed to capture the mutual tendency of sudden changes in the behavior of financial variables which prevails a long time after these changes and their impact on equilibrium asset prices. The study uses the monthly data of financial variables from January 2000 to October 2019 for Pakistan. The results show very strong evidence of regime-switching performance in the equity, bond and foreign exchange market returns. Excess return remains negative in both the States however, the values of forward premiums are positive which infers that the local currency returns in Pakistan are quite smaller and uncertain as compared to the return on foreign currency (US Dollar) holding.