Inter-Linkages Among Stock Markets of South Asia

Abstract

Purpose – Internationalization of capital markets gives opportunities to investors to invest their money in the country of their choice, not just in their own country. The relationships between international stock markets have become increasingly important in recent times. The purpose of this paper is to study the inter-linkages between stock markets of India, Pakistan and Sri Lanka.

Design/methodology/approach – This paper studies the inter-linkages between stock markets of India, Pakistan and Sri Lanka. Daily closing levels of the benchmark indices in the three countries are taken for a period of January 2003-June 2010. While line charts, correlogram and unit-root test are applied to check the stationary nature of the series; Granger’s causality model, vector auto regression (VAR) model and variance decomposition analysis are performed to find out the linkages between the markets under study.

Findings – The paper concludes that while the National Stock Exchange (India) Granger causes Karachi Stock Exchange (Pakistan) and Colombo Stock Exchange (Sri Lanka), the vice versa is not true. These results of Granger’s causality model are also confirmed by the VAR models.

Originality/value – Studies have been conducted in large numbers to test the linkages and integration between stock exchanges of the developed nations, namely the USA, Canada, Europe and Japan. Even the studies that have focused on the developing and under-developed nations have studied the linkages of those with the developed nations. Little research has been conducted about the inter-linkages between the nations from Asia. Even fewer studies have focused on stock exchanges in the South-Asian region. This research paper focuses on the return from the benchmark stock exchanges from these three countries and also on the linkages between India, Pakistan and Sri Lanka.

Keywords: India, Pakistan, Sri Lanka, Capital markets, Stock markets, International investments, inter-linkages, Granger’s causality, Vector auto regression model, Variance decomposition analysis

JEL Classification: F15, F36, G15