Connectedness Among Sectoral Stock Indices in Pakistan: Static and Time-Varying Evidence

Abstract

This study examines the spillover effects among sectoral stock indices in Pakistan over the period 2009–2022 using the spillover index methodology of Diebold and Yilmaz (2012). The methodology measures total, directional, net, pairwise, and time-varying spillovers based on generalized forecast error variance decompositions from a VAR framework. The findings reveal that the Basic Materials and Industrials sectors are the biggest net transmitters of spillovers, whereas the Financials and Consumer Discretionary sectors are the biggest net recipients. The net spillover and pairwise spillover analyses produce consistent results, identifying the same sectors as the primary transmitters and recipients of shocks. The overall connectedness index is 19.03, indicating the presence of spillover effects among Pakistan's sectoral stock indices. The rolling window analysis reaffirms the static results and shows that the Basic Materials and Industrials sectors occasionally become recipients of volatility following economic and political events. Spillover effects fluctuate mostly between 50% and 67%, with notable peaks in 2017 and 2018, when almost all sectors exhibit strong reactions. Overall, the findings demonstrate that spillover effects in Pakistan vary over time and provide useful insights for understanding sectoral interconnectedness in the equity market.