Does trade interdependency lead linkages between stock markets? A case of South Asian countries

Abstract

Purpose The purpose of this paper is to test the dynamic linkages among the stock markets of four South Asian countries (India, Pakistan, Bangladesh and Sri Lanka) in the backdrop of trade interdependency. Design/methodology/approach Listed indices are used to serve the proxy of stock markets of four countries for the period: January 2000–December 2018. The study uses the autoregressive distributed lag model and Granger causality techniques in multivariate frameworks while focusing on intraregional trade as an exogenous factor for testing the long- and short-run causality in the given data set, hence raising the quality of statistical inference. Findings The results highlight that India and Pakistan are net exporters to the South Asian region, while Bangladesh and Sri Lanka are net importers from the region. While testing the stock markets linkages, the expanded intraregional trade volumes (exports plus imports) have occurred with the significant cointegration of stock markets of India and Pakistan with the other stock markets in the long run. In the short run, the stock markets of India, Pakistan and Sri Lanka report bidirectional causality without having significant spillovers of intraregional trade on the stock prices. Research limitations/implications The study relies on the multivariate techniques with stock prices and regional trade share as the exogenous variables. Further the regulatory, political and economic conditions of sample countries are fundamentally different which in turn affect their degree of trade interdependency and integration between the stock markets. Practical implications Nonsignificant cointegration of the stock markets of Sri Lanka and Bangladesh highlights the possibility of portfolio diversification in the long run, while the significant bidirectional causalities between the stock markets highlight the lesser degree of portfolio diversifications in the short run. Originality/value Pioneer efforts are made to examine the dynamic linkages between the South Asian stock markets while focusing on regional trade interdependency. The results provide new insight in the dynamics of stock returns of South Asian stock markets in the backdrop of intraregional trade.

South Asia: Multilateral trade agreements and untapped regional trade integration

“…Further it is noted that Bangladesh and Pakistan appears close competitors to each other in the short run. These findings are consistent with earlier studies which report untapped trade integration in South Asia, hence highlighting the potential for regional trade (See, Kathuria, 2018; Kumar, 2020a, 2020b). For example, Kumar (2020b) reports that India which accounts the major trade volume in the region, mainly exports engineering products (33% of total exports) and textile and textile products (20% of total exports) to South Asia, whereas the exports of other countries from the region mainly are minerals, agriculture products cotton and cotton‐made products.…”

“…Researchers now widely apply ARDL model while investigating the economic and financial problems with small data set (e.g. Belloumi, 2014; Ghatak & Siddiki, 2001; Hoque & Yusop, 2010; Kim, Lin, & Suen, 2010; Kumar, 2020a, 2020b; Narayan, Narayan, Prasad, & Prasad, 2007).…”

“…While the other studies explore the multilateral liberalisation which causes mutual benefits in South Asia, hence offer more economic benefits to the countries in the South Asia region (see Hye, Wizarat, & Lau, 2013; Kathuria, 2018; Kher, 2012; Kumar, 2020a, 2020b). They posit the arguments of the trade complementarities which exist in South Asia because of varying trade compositions.…”

Who Moves Western Europe Stock Markets?

“…The majority of interdependency topic research always incorporates the influence of US Stock Exchange or US subprime crisis. For instance, Kumar (2019) confirmed a structural break in research data. Moreover, Sammader (2018) and Wang (2014) paper also includes US as one of the most influential country.…”

“…Several studies have focused on stock market relations of countries with which trade relations regionally. Kumar (2019) tests the dynamic linkages among South Asian stock which are member of SAFTA. Besides, Rahman et.al (2017) was also investigate the linkages between ASEAN regional country stock indexes, while adding three other countries outside ASEAN.…”