Interdependence of South Asian Equity Markets

Ghulam Ali,Talat Islam,Haroon Hussain

doi:10.19026/rjaset.7.598

Abstract

This Study aimed at exploring the relationship between South Asian Equity Markets. Four major South Asian Equity Markets (Karachi Stock Exchange, Bombay Stock Exchange, Colombo Stock Exchange and Dhaka Stock Exchange) were taken to explore this relationship. Data was taken from the year 1999 to 2009 on monthly basis. Data Analysis was conducted using co-integration Analysis for the long run relationship and VECM (Vector Error Correction Model) for the short run relationship. For the purpose of stationary of data, Unit root test was used and all series were found integrated of at first difference. Co-integration Analysis indicated that there exists no long run relationship among the equity markets of South Asia. VECM shows the similar results and no relationship were found among these markets in short run. Granger Causality, Variance Decomposition and Impulse Response Function were used and unidirectional granger causality is found from CSE to DSE, KSE to BSE and BSE to CSE. It was found that most of the changes in Colombo Stock Exchange and Dhaka Stock Market were explained due to changes or innovations in their own market. Variance Decomposition Analysis shows that Variance is Karachi Stock Market is explained by changes in its market and changes in Bombay Stock Market. Similarly Variance is Bombay Stock Market is explained by its own markets innovations or changes in Karachi Stock Market. Impulse Response Function reveals most of the market shocks in KSE are explained by its own innovations and other markets do not have much influence on Karachi Stock Market. However, result of impulse response function shows that BSE is exerting some pressure on Karachi Stock Exchange in the end periods.

Highlights

In many previous studies relationship is found among equity markets of the countries which either belongs to same region or countries having trade relationship ships like Chaudhry (1997) found integration among six Latin American Countries
Bastos and Caiado (2010), this study found the integration among the global equity market using stock market indices from 46 countries
South Asian countries belong to same economic region and have similar economic environment for the investors in many aspects

Summary

Introduction

In many previous studies relationship is found among equity markets of the countries which either belongs to same region or countries having trade relationship ships like Chaudhry (1997) found integration among six Latin American Countries. India, Bangladesh and Sri Lanka belong to the same region and economic conditions in these countries are not very much different. The Capital flow in different countries stock markets started after relaxation of capital controls after liberalization of stock market in 1975. After this liberalization many other countries took stock market liberalization policies like Stock Market liberalization in UK in 1975, deregulation in Japanese Market in 1978-79 and stock market liberalization in Karachi Stock Market in 1991. Pakistani Stock market was formally liberalized in 1991 which includes lifting restrictions on holding foreign currency, dividends transfer, capital gain, trade liberalization for foreign companies and transfer of shares to foreigner will require approval SBP only in the case if more than 5% shares in financial institutions or banks are traded

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Conclusion