Course Title: Seminar in Economics

Course ID: 107435

Course Instructor: Dr. Urooj Istaqlal

Submitted by :
Sonhera Sheikh(6606)
Asad ul Haq Hasni(10710)
 INDEX
i. INTRODUCTION OF CASE
ii. BACKGROUND
iii. COMPARATIVE ANALYSIS
iv. PROBLEM STATEMENT
v. FACTS AND FIGURES
vi. STRENGTH AND WEAKNES
vii. METHODLOGY AND EVALUATION
viii. RECOMMENDATIONS
ix. SUMMARY
Unbalanced ripple between the stock markets
of China and Pakistan: a comparison before
and during the COVID-19 crisis

Introduction

The world's stock markets have been greatly inflated by the novel Corona virus
(COVID-19). It has thrown the world's financial and economic stability into
disarray. The Shanghai Composite Index (SSEC) and the Karachi Stock Exchange,
two well-known Chinese and Pakistani stock markets, were studied for their
nonlinear behaviour (KSE-100 index). . The Shanghai Composite Index (SSEC) and
the Karachi Stock Exchange, two well-known Chinese and Pakistani stock markets,
were studied for their nonlinear behaviour (KSE-100 index). The Shanghai
Composite Index (SSEC) and the Karachi Stock Exchange, two well-known Chinese
and Pakistani stock markets, were studied for their non-linear behaviour (KSE-100
index). In terms of returns, however, control of Chinese stock markets on
Pakistani stock markets remained modest. The global emergency has been
influenced by the advent of the new corona virus (COVID-19) (Shehzad, Xiaoxing,
and Kazouz 2020). Currently, the COVID-19 has touched about 200 countries,
resulting in a rising number of deaths.
Various safety precautions, such as lockdown and reducing social interfaces, have
been implemented around the world to prevent the spread of COVID-19.
According to the Director-General of the International Labor Organization (ILO), a
complete or partial shutdown caused by COVID-19 would affect more than 2.7
billion workers, putting 25 million jobs at risk (ILO 2020).
As a result, all nations' economic activity have been disrupted. In the past,
epidemics had irreversible economic consequences by raising uncertainty. As a
result, significant increases in economic instability and uncertainty can result in
high inflation, unemployment, and a drop in tourism development, investment,
economic growth, profit margins, and trade balance.
Additionally, the study of the China Outbound Tourism Research Institute
reported that during the Chinese new year’s vacations in 2019, 6.3 million people
traveled abroad, but the figure went down dramatically in the recent period
(Ayittey et al. 2020). Further, the
sale of Airlines, Cruise lines, Hotels, Online Travel Agencies (OTAs), and Rental
cars has also declined due to COVID-19.

In terms of imports and exports, China has surpassed the United States as
Pakistan's most important trading partner. Financial ties and mutual commerce
began between them in 1963, when they signed the first bilateral long-term trade
agreement (Ministry of Finance 2014).
Pakistani-Chinese trade is quickly expanding, and China has surpassed the United
States as Pakistan's second-largest importing partner (Irshad and Xin 2015).
Pakistani-Chinese commerce is growing at a 12.57 percent annual rate, and the
two countries have committed to reach a target of US$ 20 billion in the future.

BACKGROUND
Novel Corona-virus (COVID-19) has prominently exaggerated the inventory
markets of the world. It has distraught the monetary and monetary fidelity of the
globe. The look at scrutinized the nonlinear conduct of famous Chinese and
Pakistani inventory markets, i.e. the Shanghai Composite Index (SSEC) and the
Karachi Stock Exchange (KSE -one hundred index). The evaluation applied the
VAR-DCC-MEGARCH version to decide the returns transmission and volatility
spillover sample of those markets all through the trendy and COVID-19 era. These
outcomes inveterate, all through regular circumstances, returns generated with
inside the monetary markets of Pakistan expressively manipulate the go back
moves of SSEC. However, manipulate of Chinese inventory markets on Pakistan’s
inventory markets in phrases of returns remained insignificant. The research
evaluated that volatility spillover among the KSE -one hundred index and SSEC
become insignificant all through the solid periods. Nonetheless, the information
of volatility spillovers all through the pandemic era showed that instability with
inside the SSEC portentously upsurges the uncertainty of the KSE -one hundred
index. Besides, the look at stated a sizable leverage impact for each markets all
through the pandemic era. The look at found out that SSEC is the fine inn for
Pakistani traders to diversify monetary risk.
COMPARATIVE ANALYSIS:

This observe implied day by day fees of the Shanghai Composite Index (SSE) and
Karachi Stock Exchange one hundred index (KSE - one hundred) to symbolize the
inventory markets of China and Pakistan, respectively. The exam used the
statistics from January 4, 2010, to May 11, 2019, and divided this into sub-
categories, i.e. panel A, earlier than the outbreak of COVID-19, and panel B, for
the duration of the pandemic era.

PROBLEM STATEMENT
The volatility spillover among the KSE -one hundred index and SSEC become
insignificant at some stage in the strong periods. Nonetheless, the facts of
volatility spillovers at some stage in the pandemic technology showed that
instability with inside the SSEC portentously upsurges the uncertainty of the KSE
-one hundred index. Besides, the observe mentioned a large leverage impact for
each markets at some stage in the pandemic technology. The observe discovered
that SSEC is the first-class hotel for Pakistani traders to diversify monetary risk. All
international locations financial interest had been disrupted. In the past,
epidemics had irreversible financial outcomes with the aid of using elevating
uncertainty. As a result, large will increase in financial instability and uncertainty
can bring about excessive inflation, unemployment, and a drop in tourism
development, investment, financial growth, income margins, and alternate
balance.

FACTS AND FIGURES

Several factors drive worldwide market integration, including

 Increased international commerce and finance between national economies.
 Open-door policies and liberalization measures that allow international
investors to engage local marketplaces. communication and information
technology improvements.
 The contagion effect
 The gradual relaxation of capital flow restrictions.
The analysis of stock market integration may be important for asset pricing and
allocation, risk diversification, trading and hedging methods, and capital market
regulation.
For both eras, Table 4 shows the consistent correlation between the KSE-100
index and the Shanghai Composite Index (SSEC). According to the data, these
markets are doing well.and have a strong association, but this correlation is
especially strong during pandemics. However, as several investigations have
shown, these figures do not reveal all of the information.

STRENGTH AND WEAKNESS

In terms of imports and exports, China has surpassed the United States as
Pakistan's most important trading partner. Financial ties and mutual commerce
began between them in 1963, when they signed the first bilateral long-term trade
agreement (Ministry of Finance 2014). Following that, China and Pakistan reached
an agreement known as the Free Trade Agreement.
They have exchanged high-level visits in order to verify that different agreements
and investment plans are in place at both the government and corporate levels
(Irshad and Xin 2015). China has pledged to invest $46 billion in Pakistan as part
of the CPEC (Shah 2015). As a result, the financial markets of Pakistan and China
are becoming increasingly linked, and a single incident in one of these markets
might result in significant profit or loss.
Pakistani-Chinese trade is quickly expanding, and China has surpassed the United
States as Pakistan's second-largest importing partner (Irshad and Xin 2015).
Pakistani-Chinese commerce is growing at a 12.57 percent annual rate, and the
two countries have committed to reach a target of US$ 20 billion in the future.
Hussain et al. (2012) used an inferred impulse response and a Granger causality
test to find that China has no association with KSE, but that there is a
unidirectional relationship between Japan and China. Dedi and Yavas (2016) used
multiple GARCH models to examine returns and volatility transmission and found
that Germany and Russia's volatility strongly spillovers the volatility of china.

METHODOLOGY AND EVALUATION

The Shanghai Composite Index (SSE) and the Karachi Stock Exchange 100 index
(KSE-100) were used to reflect the Chinese and Pakistani stock markets,
respectively. The study looked at data from January 4, 2010, to May 11, 2019, and
divided it into two sub-categories: panel A, which was before the COVID-19
epidemic, and panel B, which was within the pandemic phase.

Mean and volatility spillovers model

To determine the mean and shock spillovers pattern between China and Pakistan,
this study used the bi-variate Vector Auto-regressive (VAR) Dynamic Conditional
Correlation (DCC) Exponential Generalized Auto-regressive Conditional
Heteroskedasticity (EGARCH) model, which was developed by Engle (2002).
Where, mean Equation (Equation 2) includes the VAR model with one lag period,
and Yi,t nominates the stock return series i and Pi,0 is the constant term.
However, if i = j then Pi,j estimate the mean return transmission from j to i and
when i = j then it measures the lagged returns effect for the upcoming period of
its own return series. Whereas, z symbolizes the random error term of series i at
time t. On the other hand, l2i ,t in Equation 3 determines the conditional volatility
of series i at time t in our bi-variate
model, and vi is the intercept coefficient of variance series i. Likewise, if the case
is i = j, ki,j denominate the coefficient, which calculates the volatility spillovers
from variance series j to i. On the other hand, when i = j, k,i,j shows the Auto-
regressive Conditional Heteroskedasticity (ARCH) effect of series i. Additionally, Ci
is the coefficient that tells about the impact of its own volatility on next day
volatility i.e. GARCH effect, and f j is the parameter that assesses the asymmetry
effect of variance series j. Here n = 2 for both equations.

RECCOMENDATIONS
We investigate the association between the spread of COVID19 and the KSE index
in Pakistan using quantile on quantile based coefficients, as shown in Figure
Figure2.2. According to the findings, the stock market has reported COVID19 mix
evidence.
As in the figure, we can see that it starts declining at the start of March. However,
in March, the trading has stopped in KSE due to sudden downfall in KSE‐100
index. It has been observed that the KSE index start declining which turn to its
historic lowest point of the last 5 years. One of the reasons for such decline is the
drawing of foreign investment; in the last 2 years, there were $3.5 billion of
foreign portfolio investments in the stock market of Pakistan which started
withdrawing. Resultantly, within 2 weeks, $2 billion has withdrawn from Pakistani
stock market. At the same time, cases started increasing in Pakistan and at the
end of March, this figure is close to 5,000 cases.
SUMMARY
The world's stock markets have been severely impacted by a novel Coronavirus
(COVID-19).
It has harmed the world's financial and economic stability. The Shanghai
Composite Index and the KSE-100 index, two well-known Chinese and Pakistani
stock markets, were studied for their non-linear behaviour.
The VAR-DCCMEGARCH model was used in the inquiry to determine the
transmission of returns and volatility spillover.
During the traditional and COVID-19 eras, these markets followed a similar path.
The results previous returns of the KSE-100 over the standard period, according to
the model. The present returns of the SSEC are heavily influenced by the index.

Furthermore, the KSE-100 index's one-period lagged returns considerably control

its own returns at time t. However, one period of SSEC's return values
demonstrated no significant influence on its own returns at time t. During the
pandemic era, on the other hand, SSEC's earlier returns have a negative impact on
its own returns at time t.
During the standard era, however, the investigation discovered strong ARCH and
GARCH effects for both markets. The KSE-100 index had a negligible leverage
effect, but the gamma factor of SSEC indicated that favourable news in the
market would significantly boost the returns of SSEC when compared to negative
news.
The analysis found that bad news about COVID-19 had a significant impact on
these markets. In comparison to the KSE-100 index, China's stock markets
rebounded quickly from the effects of COVID-19-related shocks. Furthermore, the
analysis found that during the pandemic, a $1 long investment in SSEC could be
hedged for 79 cents.

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