Bubbles Identification in an Emerging Economy and Within Stock Markets of its Trading Partners: Evidence from a GSADF Approach

The world is a global village, and all economies are connected (negatively or positively) with each other. A financial crisis in one economy is likely to have an impact on the other economies. Since the stock exchange plays an important role for a country due to its ability to mobilize local resources for fruitful investment, thus it is mandatory to detect, and date-stamp any bubble(s) in the stock market of a particular country and its major trading partners to save these economies from any crises leading them toward sustainable growth. Current literature on Pakistan though discusses the bubble detection issues but no study is available that analyzes bubbles in Pakistan as well as its major trading partners. In addition, if there is any bubble in one of the chosen countries then what will be the impact of this bubble on a specific or any other country and with what magnitude? This study fills in this void by contributing to the existing literature in two ways, first, it analyzes the presence of bubbles in the stock markets of Pakistan and its major trading partners and in addition, it also provides the level of connectedness among these stock markets and the impact of any shock in one of the chosen countries on a specific country or on the rest of the countries. The empirical analysis is based on monthly data from Jan 2000 till Oct 2022 and the bubbles are detected via state of art generalized supremum ADF (GSADF) test while the connectedness is tested via the Diebold and Yilmaz [(2012). Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57–66] approach. Some interesting results are obtained based on the empirical findings and relevant policy recommendations are made.