Relationship between Developed, Emerging and South Asian Equity Markets: Empirical Evidence with a Multivariate Framework Analysis

Shahzad, Syed Jawad Hussain and Ahmed, Tanveer and Rehman, Mobeen Ur and Zakaria, Muhammad (2014): Relationship between Developed, Emerging and South Asian Equity Markets: Empirical Evidence with a Multivariate Framework Analysis.

Abstract

This study is the first effort to establish a short and long run relationship between developed (US-S&P500 index and UK-FTSE100 index), emerging (DJ TOXX 600) and South Asian (India, Pakistan and Sri Lanka) equity markets. Using the data from Jan 1998 to Dec 2013, this study have tested the unit properties of indexes returns in the presence of two structural breaks applying Clemente et al. (1998) detrended test. The Auto-regressive Bound Testing (ARDL) approach to cointegration is used to determine the cointegration relation. After cointegration is found between the stock markets of interest, Dynamic OLS (DLOS) cointegration equations are applied to estimate long run co-efficients. Short run relationship is determined through Vector Error Correction (VEC) based Granger causality, Impulse Response Function (IRF) and Variance Decomposition Analysis (VDA). Findings reveal that South Asian markets, developed and emerging markets are cointegrated. The impact of developed markets on emerging markets as well as South Asian markets is noted. Stock markets in South Asian countries are closely linked with each other and developed & emerging markets are interlinked. In short run, Indian and S&P500 index are not impacted by the other South Asian and emerging markets. However, FTSE100 index is closely linked with South Asian markets. S&P500 not only impacts emerging markets but also Granger cause South Asian stock market indexes. Correlation between South Asian regional markets have decreased with each other whereas, it have increased with developed and emerging stock markets over time. However, international diversification benefits of South Asian stock markets for potential foreign investors is still evident due to lower long and short run relationship with developed and emerging stock markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: South Asia equity markets, Developed equity markets, Emerging equity markets, Market integration, ARDL, VECM Granger causality
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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