Dynamic Linkages among South Asian Stock Markets with Special Reference to Sri Lanka, Pakistan and India

Abstract

This paper aims to examine the dynamic nature of equity market integration of key South Asian stock markets to determine and spotlight diversification potential by analyzing the linkages among three major South Asian Equity Markets; Karachi Stock Exchange (KSE), Bombay Stock Exchange (BSE), Colombo Stock Exchange (CSE). Ten years of monthly equity market index data were analyzed for long and short-term relationships through correlation, co-integration, granger causality, VAR model, Variance decomposition, and Impulse response analysis. It was found that the key South Asian stock markets are closely linked with each other depicting a long-run relationship. Also, it shows that the impact of shocks on regional markets, requires around two to five weeks for the shocks to be adjusted. There are diminishing diversification benefits for international investors by diversifying their portfolio among South Asian stock markets. But from tracking market indices can result in arbitrage or speculative profit, owing to weak adjustments in markets between the countries. South Asian stock markets are rapidly evolving and considered as a lucrative avenue by global investors owing to their immense growth and weak correlation with international markets.