Financial instability, integration and volatility of emerging South Asian stock markets

Abstract

Purpose The purpose of this paper is to examine the short- and long-run spillover effect of international financial instability on emerging South Asian stock markets. The paper also investigates the financial integration regionally. Design/methodology/approach Granger causality test is used for short-run causal relations. Since results of preliminary test highlight the significant autocorrelations in stock returns, GARCH class models with extreme shocks in international financial market are utilized to test the long-run spillover impact on stock returns. Findings Results indicate significant short- and long-run spillover impacts of international financial instability on the stock returns. They highlight the significant co-integration of South Asian stock markets with the international market. Significant correlations in stock returns and volatility reveal the degree of regional integration to be high between India, Pakistan and Sri Lanka. Research limitations/implications Business, political and market conditions of South Asian stock markets are fundamentally different from each other. These economies were liberalized at different time, which in turn may affect the degree of integration with international equity markets and regionally alike. Practical implications Financial liberalization has linked the South Asian stock markets to the rest of the world. Stock prices move in the same line with the emergence of global expected and unexpected economic shocks. The benefits that arise from the diversification of funds will be eradicated in the long run. Investors with long investment horizons will not actually benefit from portfolio diversification in South Asian equity markets. The Bangladesh stock market does not respond to volatility in international market in the short run and may be a good destination for short-term investment. Originality/value Pioneer efforts are made by utilizing a novel approach with the use of net volatility change in world financial instability for measuring the short- and long-run impacts. Given the emergence of South Asian stock markets, new insights into their vulnerability to world financial shocks provide interesting findings for portfolio diversification.

Dynamic analysis of the relationship between stock prices and macroeconomic variables

“…Since the South Asian stock markets are integrated with the international stock markets (Kumar and Dhankar, 2017), the international financial crisis may affect developing economies through finance and trade (Ali and Afzal, 2012). In addition due to the financial crisis, net capital inflow from advanced economies dramatically reduced in developing economies.…”

South Asia: Multilateral trade agreements and untapped regional trade integration

“…At the regional level, the economic cooperation among the South Asian countries is found very low. For example, Kumar and Dhankar (2017) report that the intra regional trade of South Asia stands only 5.20% which is substantially low as compared to the other trade blocs worldwide. They report that trade is heavily oriented towards extra‐regional markets.…”

Co-movements between Islamic and Conventional Stock Markets: An Empirical Evidence

“…Some researchers (Chowdhury et al 2017)) found that the stock returns of Dhaka Stock Exchange, Bangladesh has co-integration relationship which restricts the portfolio diversification benefits with other countries. On the other hand, some researchers (Kumar & Dhankar 2017;Sehgal et al 2018) show evidence that the stock return of Bangladesh has no long-run relationship which confirms the presence of portfolio diversification benefits across countries. However, to date, no studies have been conducted on the Islamic and conventional stock markets in Bangladesh and Malaysia, and this gives credence to the idea of conducting a study on both countries which may serve as a catalyst to fuel their continued growth.…”

“…Secondly, most of the previous studies have covered conventional stock markets co-movement in developed countries perspectives (Huang 2020;Hitoi & Pochea 2019;Das & Manoharan 2019;, and very few studies have focused on the comovement between the Islamic and conventional stock market in the context of emerging economies such as in Bangladesh and Malaysia (Sehgal et al 2018;Kumar & Dhankar 2017;Chowdhury et al 2017).…”