Casual and dynamic linkage of stock markets: An empirical study of Karachi Stock Exchange (KSE) with emerging and developed equity markets

Abstract

The main purpose and scope of this empirical study is to explore the causal and dynamic linkages of KSE-100 with emerging stock markets of India, China, Hong Kong, Malaysia, Indonesia, Thailand, Turkey, and Brazil, as well as with the developed stock markets of Japan, USA, UK and France for the period of January, 1998 to December, 2008. 132 monthly stock indices observation are taken. Descriptive analysis, correlation analysis, unit root test, co-integration test, vector error correction model, granger causality test, variance decomposition test and impulse response test is used to identify the existence of short run and long run relationships. Empirical results conclude that KSE-100 is a volatile market and have suitable level of returns. Moreover, JCI and BCI have long run relationships with KSE, and SCI have short run relationships to KSE. The equity markets of BSE, SCI, SET, KLSE, JCI, ISE, BCI and Nikkei-225 granger causes to KSE-100 and KSE-100 granger causes to HSI, SET, KLSE, JCI. Further study explores that the major change in KSE-100 is due to its own innovations and other markets have no significant impact on the KSE. The findings conclude that there is a further need of future study to explore the factors of economic integration among these stock markets. The overall study creates awareness to economic and financial decision makers, international investors, regional investors, investment agencies and banks, about the opportunities of portfolio diversification benefits, funds management and trends of the stock market. Key words: Indices, linkages, portfolio diversification, co-integration, vector error correction model, emerging markets, developed markets, economic integration, KSE-100.