Do Outliers Matter in Return and Volatility Linkages? A Case of Sectoral Stock of PSX and Brent Oil

Abstract

This paper focuses at the return and volatility link between Brent Oil and stock sectors of Pakistan Stock Exchange by taking into account the outliers. The newly proposed Laurent et al. (2016) methodology has been applied for the detection and correction of outliers. Bivariate VAR(1)-AGARCH(1,1) model has been estimated using data sampled from 01-01-2001 till 31-12-2015. Optimal weights and hedge ratios for oil-stock portfolio holdings have also been analyzed. It has been observed that the model estimates are alive to the presence of outliers. Unidirectional short-run price spillovers are found significant from oil market to the stock sectors. Whereas, no volatility spillover between Brent oil and sectors of Pakistan Stock Exchange have been found neither in the short-run and nor in the long-run. The outcomes of this study will help investors, portfolio and hedge fund managers in making sane decisions about portfolio diversification, risk management, and international assets allocation.