Volatility Spillovers and Portfolio Risk Management: Evidence from Pakistan and International Stock Markets

The financial events occurrence including the crisis and pandemics increased the panic in the global financial markets. Investors are in trouble for investment due to the cointegration pattern between the global markets in the period of these events. Investors belongs to different regions want to minimize their risk at given expected return. Some previous research provides the solution of the investors troubles by investigating different factors that affect the investment risk and return in the portfolio. This study provides a wide range of investment strategy that is helpful for the investors to minimize the portfolio risk by taking the cointegration or co-movement pattern in mind while preparing the effective portfolio. We used the dynamic conditional variance, correlation, covariance, dynamic portfolio weight, hedge ratio and hedge effectiveness for all selected markets. The financial crisis in the global economy effects the volatility of the return. Based on the portfolio weight, investors should increase their investment any portfolio that is favourbale provided by the study during the period of crisis and pandemics. Moreover, our findings shows that all hedge ratios are higher at the period of different financial crisis as well as pandemic COVID-19 also. The results of the hedge effectiveness reveals that the risk-adjustment return can be favorable and improved through constructing the effective portfolio. Our findings shows that the most diversifying and hedging advantageous European/developed market pairs are France- Germany and UK -France, and with a high value of hedge effectiveness, these are the best to include in low-risk portfolios. Aspiring and Asian market pairs, such as Japan-China and Malaysia-Singapore, are a moderate diversification on the ground of hedge effectiveness, appropriate to either balanced or medium-risk strategies. Conversely, the correlations of Pakistan with major economies reflect very low or negative hedge effectiveness, which means that they are highly diversified with great portfolio risk. These findings advocated the significant implications for investors and the portfolio manager around the globe.