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Abstract

This study investigates the dynamics of volatility and its spillover effects between the stock markets of China, India, and Pakistan, and their respective exchange rates (USD/CNY, USD/INR, and USD/ PKR). Volatility is modeled using the Symmetric and Asymmetric BEKK-GARCH (1,1) and DCCGARCH (1,1) models, based on daily return series covering the period from January 1, 2019, to January 31, 2025. The empirical results indicate that both the employed models are adequate for capturing the volatility dynamics. The findings reveal that the highest value of portfolio weights and hedging efficiency of KSE-100 Index–USD/PKR provide optimal portfolio allocation and highest hedging performance compared to other selected stock-exchange relation. Whereas the highest negative hedge ratio shows a strong inverse relationship between stock- exchange rate markets in China most making it the most effective hedging pair in reducing portfolio risk. This suggests that Chinese investors should assign a larger portion of their portfolios to foreign exchange assets compared to equities; therefore, China's stock market is highly sensitive to exchange rate movements.

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