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Behaviour of Stock Markets in South Asia

An Econometric Investigation

Department of Economics, University of Ruhuna, Matara, Sri Lanka, E-mail: gunasinghe{at}econ.ruh.ac.lk, Tel: (+94)0412227014, Fax: (+94)0412227014 The author gratefully acknowledges the comments and suggestions made by Dr Saman Kelegama, anonymous referees and Dr Amala de Silva. The author would also like to thank Professor D. Atapattu, Dr J.S. Bandara, Dr A. Gunasekarage, Mr K.H. Nandasiri and participants at the Sri Lankan Statistical Conference held in 2004 at the PGIS in the University of Peradeniya for their helpful suggestions.

This paper examines the integration behaviour and volatility spillover transmissions across the stock markets of Sri Lanka, India and Pakistan, after liberalization policies initiated in the early 1990s. The paper examines ways in which these two issues could relate to movements of stock prices and then investigates the impact of this on the corresponding stock markets using correlation analysis, a multivariate co-integration test and generalized impulse response (GIR) functions based on a one factor model. The estimated correlation results show a marginal growth of integration for India-Sri Lanka and India-Pakistan combinations for the period 1997–2002 compared to 1992–96. The multivariate co-integration test does not provide evidence on any long-run relation across these markets. However, as co-integration test does not consider a gradual integration process among these markets, the rejection of the presence of a long-run relationship does not imply that these markets are totally independent of one another. Results of the GIRs test used to answer the second issue raised in the paper confirm that a sudden change of the Indian stock market may have some marginal spillover effects on Sri Lanka and Pakistan stock price movements.

Key Words: Stock market integration • Volatility spillover transmissions • South Asia

South Asia Economic Journal, Vol. 6, No. 2, 165-191 (2005)
DOI: 10.1177/139156140500600201


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