DYNAMIC LINKAGES BETWEEN ECONOMIC POLICY UNCERTAINTY AND STOCK MARKET INTEGRATION: EMPIRICAL EVIDENCE FROM SAARC REGION

Abstract

This study attempts to empirically test whether the economic policy uncertainty (EPU) in developed economies affects stock market integration across developed and developing countries. We find that the correlations appear to be time-varying and are being influenced by financial crises. The EPU of the developed economies has a negative impact on their stock market interdependence with Pakistan, but a positive impact on stock market correlations between India and the US, India and the UK, Bangladesh and the EU, Sri Lanka and the EU, and no impact on correlations between India and the EU, Bangladesh, and the US. Additional robustness tests reveal that the global financial crisis (GFC) has a substantial influence on all stock market correlation pairs, apart from any pairs with India, whereas the Asian financial crisis (AFC) only has a significant impact on the Sri Lanka–EU relationship. Finally, the study suggests that the EPU in the US, UK and EU has a great influence on the interdependence of the stock markets between South Asian Association for Regional Cooperation (SAARC) and developed nations.