Long Run Relationship Between South Asian Equity Markets and Equity Markets of Developed World PDF

International Journal of Management and Strategy
(IJMS) 2012, Vol. No.3, Issue 5, July-Dec.2012
http://www.facultyjournal.com/
ISSN: 2231-0703
LONG RUN RELATIONSHIP BETWEEN SOUTH ASIAN EQUITY MARKETS AND

EQUITY MARKETS OF DEVELOPED WORLD
Muhammad Mansoor, University of Sargodha, Mianwali- Pakistan
Arshad Hassan, Muhammad Ali Jinnah University, Islamabad- Pakistan
RanaHaroonHussain, University of Sargodha, Bhakkr- Pakistan
ABSTRACT
This study examines the relationship between the Major Asian Equity markets and the Developed equity
markets. This study used weekly stock prices indices of KSE100, BSE500, AORD500,ASPI250, CAC40,
FTSE100, IBEX35, Nikkie 225, S&P500 and S&P/Tsx Composite Index for the period 1st week of
January-2000 to last week of March/2012.This study applied Descriptive statistics, Augmented Dickey
Fuller Test, Phillips perron test,Johansen and jelseluis Co-integration test, Granger causality test, Vector
error correction model and Variance decomposition test find out the relationship among the Asian and
developed equity markets. This study concludes that the South Asian equity markets have no
relationshipwith developed equity markets in long run while show significant relationships in short run.
This study assistance the investors in decision making to achieve diversification by making investment in
South Asian equity market and developed equity markets.
Key words: Portfolio, Diversification, Stock market, Globalization, Co-integration, unit root test, South
Asian Countries, Devloped countries.
INTRODUCTION:
Today world becoming global village. Countries are reducing the barriers to promote
globalization to achieve maximum profit and maximize the wealth of the shareholders. WTO is
one of the strong institutions who promote globalization by promoting globalization of
production, globalization of markets and globalization of financial markets. So we can say the
objective of globalization to maximize profitability and minimize unsystematic risk. During the
last decades the interrelation among the stock markets is increases significantly specially in the
last two decades the co movements among equity markets are increased significantly. No doubt
the objective of globalization of market is to diversify risk but strong relationship and co

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movements among the equity markets make limited the diversification. International
Diversification suggests investing in those equity markets, which are low correlated. Number of
studies conducted on the correlation and integration of equity markets which helps the investors
in making investment decision about the portfolio diversification.
The purpose of this study is to analyze or explore the relationship among the major South Asian
stock markets i.e. Pakistan, India and Sri Lanka and developed countries like Australia, France,
UK, Spain, Japan, USA and Canada. This study focuses the liberalization and deregulation in
major South Asian equity markets and their impact on developed equity markets. This study also
focuses on whether the major South Asian markets attract the investors or not and whether
investors can take benefits from diversification by investing in emerging equity markets. In this
study we target the three major South Asian markets and equity markets of seven developed
countries. The indices are used in KSE100(Pakistan), SENSEX30(India), ASPI 250(Sri Lanka),
AORD500(Australia), CAC40(France), FTSE100(UK), IBEX35(Spain), Nikkei225(Japan), S&P
500(USA) and S&P/TSX Composite Index (Canada).
The trend of foreign direct investment was influenced due to process of deregulation and
liberalization in the world. In United Kingdom the liberalization of equity markets occur in 1975,
in Japan deregulation and liberalization of equity markets occur in 1978-1979, liberalization of
equity markets occur in Pakistan in 1991. Due to the liberalization the investor has an
opportunity to invest in local and foreign equity markets. Investors have an opportunity to
diversify their portfolios by investing in negatively correlated equity markets. If the investor
select those equity markets which are integrated or have positive relationship than it will increase
the portfolio risk. Finally the basic purpose of diversification is to minimize risk so investor will
make investment in negatively correlated securities. Furthermore the founder of diversification
concept is Markowitz (1952,59), who explained that the investor should invest in different
countries if they want to minimize their risk. Lot of studies conducted on major stock markets
shows that the south Asian markets are emerging markets and they are not co-integrated with the
developed stock markets. Hassan et al (2008) and Lamba(2005).
There are three objectives of this study. Firstly to identify long run relationship exists between
equity markets of south Asian and developed countries. Secondly to explain the lead and lag
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relationship between equity markets south Asia and developed world. Finally to study the short
term dynamics the relationship between south Asian markets and developed world.
Second Chapter covers review of the Literature regarding to theoretical and empirical work on
Major south Asian and developed countries stock markets. Third chapter explain data used
methodology adopted for this study. Fourth chapter presents the results and discuss the results of
the study. Last chapter conclude the study and suggest implication on the base of chapter 4.
LITERATURE REVIEW:
Hasan et al.(2008) investigated long run relationship among Pakistan, US, UK, Germany,
Canada, Italy Australia, Japan and France for the period 2000 to 2006 by taking weekly values
of stock market returns. This study used Johansen and Juselius multivariate Cointegration
analysis. Results shows that KSE is not co-integrated with the US, UK, Germany, Canada, Italy
and Australian market while KSE is co-integrated with the France and Japan. It further used
impulse response and variance decomposition analysis which result shows KSE is generally
independent but US and UK Markets have small impact on KSE. This study concluded that the
investors of developed countries need to make diversify their portfolio by investing in Karachi
Stock market. Hatemi-J et al(2007) examine the relationship among stock exchange of Australia,
US, UK, Hong Kong, Singapore, Taiwan and Korea by applying for 1 January 1993 to 10
September 2001. The bootstrap Granger-causality tests and their results shows that there is low
correlation occur between Australia and these markets. This study concluded that for the
Australian investors have opportunities to invest in these markets and diversify their portfolio.
Azmi
et
al(2004)
conduct
the
study
on
stock
market
interdependence
between
ASEAN(Association of Southeast Asian Nations, i.e. Malaysia, Singapore, Thailand, Indonesia

and the Philippines) market for the period Jan 1990June 2004 by employing Cointegration test,
VECM analysis and vector decomposition analysis for pre control and past control period in long
run and short run. This study concluded that Malaysian stock return causes short run
disequilibrium for other ASEAN market in post control period.Park(2010) studied between the
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Asia Equity markets including Thailand, Malaysia, Indonesia, Singapore, the Philippines, Korea,
Japan, China, Hong Kong, Taiwan, and India and the US Equity market for the time period
2005-2008. This study noted that there is strong co movement of the Asian developed market
including Japan, Singapore, Hong Kong on other Asian equity markets. The study results show
that Japan and Philippines markets are more sensitive with the change in US market and the
linkage between the US market with Thailand, Malaysia and China is very weak.
Lamba (2005) conducted a study on the relationship between the South Asian equity markets and
developed country Equity market. This extensive study discussed stock markets of Pakistan,
India, Sri Lanka, UK, US and Japan for the period july1997-Feb2003.It used multivariate
Cointegration framework and vector error correction model which results shows that Indian
Equity market is highly influenced by US,UK and Japan equity market and this influenced
increases in for time period Jan 2000 to February 2003.It reported that Pakistani and Sri Lankan
markets not affected by developed country market as compare to India and there is no significant
relationship exist between Indian equity market and both Asian markets. Subhani et al(2011)
investigate the linkage between the South Asian stock markets including Pakistan, India,
Bangladesh, Nepal stock exchanges by employing Johansen Co-Integration analysis for the
period May-1995 to May-2011.This study used Augmented dickey fuller test to check the
stationary of data. It concluded that Pakistan stock market is co-integrated with Bangladesh stock
market and not co-integrated with Indian and Nepal stock exchanges. Therefore by investing in
Pakistan Stock market there chance for Nepal and Indian investor to achieve diversification.
Rivero et al.(2010) studied the relationship among the developed countries equity markets
including US,JAPAN and US by using boosting-based classification technique for the period
june,1986-june2004.It reported that there is causality relation between US market to both
Japanese and UK market and S&P has more incremental information which can help to predict
the increase and decrease trends of returns in other three stock markets. Zhang(2011) investigates
the Linkage between the Asian countries including Japan, Singapore, Chinese mainland, Hong
Kong and US counties stock market for the period 1991-2007 by employing Augmented Dickey
fuller(ADF) unit root test and Phillips Peron tests and VAR equation. This study concluded that
US equity markets has strong effect on Asian markets except the Chinese mainland stock market
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and linkage among the Asian markets (excluding china) increased after the Asian financial
crises.
Al Hedi(2004) conduct study on relationship of Stock market integration and expected gain
from international portfolio diversification by using GARCH approach on developed
and
developing market. It reported that there is integration among the stock markets and investor can
gain more profits or gain from international diversification as compare to investing in domestic
market portfolio.Arouri(2008) investigate the hypothesis of market integration by applying
Nonlinear Error Correction Models (NECM),the Exponential Switching Transition ECM
(ESTECM) and the nonlinear ECM-Rational Polynomial (NECM-RP),KPSS and R/S test for the
Philippines and Mexico equity markets for the period December 1988-december 2008. Results
shows that the Mexico is highly integrated with world as compare to Philippines.
Ahlgren et al.(2010) testing the cointegration between the Finland, France, Germany, Sweden,
UK and USA for the period january1980 to February 1997 by employing Johansen maximum
likelihood(ML) method and likelihood ratio(LR) tests. The Study result shows that international
stock prices are not co integrated. This study use the both monthly, quarterly stock prices and
concluded that Johansens LR tests for Cointegration are sensitive to the lag length specification
in the VAR model. This study found generally more evidence for Cointegration in higher order
VAR models. Naryan et al.(2006) explore the relationship among the Australian stock market
and G7 countries including Canada, Italy, Japan, UK, France, Germany, USA by applying the
both johansen and Gregory and Hansen tests for the period 1960-2003. This study concluded that
Australian equity market has pair wise linkage with Canada, Italy, Japan and the UK but not
linkage with French, German and Americans equity markets.
This study attractiveness is, it covers the long period 1st week of January 2000-last week of
march2012. Other studies Hasan et al(2008) and Lamba(2005) conducted on South Asian equity
markets and developed Equity markets used less spam of time. This study used most recent stock
returns prices of equity markets which represents the current picture of equity markets to
investors. Husssain et al.(2012) investigate the relationship by taking one South Asian equity
market(KSE) with other equity markets.Hasan et al. investigate the relationship by taking one
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South Asian equity market(KSE) with developed equity markets. Hasan and hamid(2011)
investigate the relationship by taking two South Asian equity markets with developed equity
markets.
METHODOLOGY:
In this study we take weekly stock prices indexes of KSE100, BSE200, AORD500,ASPI250,
CAC40, FTSE100, IBEX35, NIKKEI225, S&P500 and S&P/TSX Composite Index for the
period 1st week of January-2000 to last week of March/2012.To calculate the continuous
compounded rate of return we use the following Equation:
Rt = ln(Pt / Pt- 1 )
Rt = Return for Given Periodt, Pt = Price at closing time, Pt-1 = Price at the opening time , ln = Natural
Log
In this study we analyze relationship among the stock exchange market by applying the
following tests includingDescriptive statistics shows the trend of returns in the equity markets in
the sense of which equity market shows high return, low return and volatility in returns.
Generally Correlation Matrix technique used to explains the degree of relationship among the
different variable or series. So here we use this technique to explore the relationship among the
time series data about stock market returns. VAR technique is use to determine the proper lag
length because for the application of Johnson and Julius Approach the stationary of data is
essential.For the application of co integration Johnson and Julius Approach is essential that data
should be stationary and integrated at same level. To get achieve the 1st objective means
stationary of data we use different unit root test. These include augmented dickey fuller test
(ADF) and Philip Peron test.Co integration is a technique which tells you about the co movement
among two series in long run. Granger theorem explain that if the co integration test applied
among two variables and the results shows that these two variables are co integrated than the
cause and effect relationship exist among these variable may be in one direction and in both
directions.Impulse response function explains the changes in standard deviation. Variance
decomposition can be defined as decomposition of variance due to changes in same series or
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other series.Vector error correction model is used to find short run relationship among the
variables.
RESULTS
Table 4.1Descriptive Statistics
KSE
(pakistan)
SENSEX
(india)
ASPI 250
(srilanka)
AORD
(Australia)
CAC 40
(france)
FTSE
(UK)
IBEX
(spain)
NIKKEI
(japan)
S&P
(usa)
TSX
(canada)
Mean
0.003824
0.001817
0.003529
0.000541
-0.00018
0.000181
-0.00052
-0.00096
-3.64E-05
0.000605
Median
0.007621
0.005063
0.001009
0.002987
2.64E-05
0.00028
0.002683
0.001712
0.001213
0.003926
Maximum
0.12795
0.131709
0.179536
0.081012
0.092208
0.050323
0.118234
0.114496
0.113559
0.128171
Minimum
-0.20098
-0.17381
-0.11327
-0.1771
-0.05635
-0.04779
-0.23827
-0.27884
-0.20084
-0.17542
Std. Dev.
0.036241
0.035845
0.029459
0.022134
0.015713
0.0118
0.032828
0.031721
0.027481
0.02698
Skewness
-0.99041
-0.54483
0.62088
-1.21002
0.042962
-0.15702
-0.87247
-1.27312
-0.77636
-0.88222
Kurtosis
6.92368
5.357002
7.377948
10.62872
6.163043
4.579899
8.616395
12.46654
9.149885
8.979096
Jarque-Bera
512.7562
178.9658
549.6353
1700.099
265.7411
68.86762
918.0423
2550.621
1067.825
1031.484
Probability
Table 4.1 shows then descriptive of stock markets. The table shows the Mean, Median,
Maximum, Minimum, Standard deviation, Skewness and Kurtosis. The result shows that Karachi
stock exchange and Colombo stock exchange show high return. Sensex stock exchange, AORD,
FTSE and TSX shows positive returns in that time period.CAC40, IBEX and NIKKIE shows
negative returns in this period. Standard deviation of KSE is high as compare to other equity
markets which shows the Karachi stock exchange is more volatile as compare to the other equity
markets. KSE shows high return because it more volatile than other equity markets.

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Unit Root Analysis

Table 4.3
ADF (Level)
ADF (1st Difference)
Phillips-Perron (Level)
Phillips-Perron (1stDifferenc)
-1.49926
-21.4546
-1.5137
-21.5937
-0.36022
-15.5051
-0.45998
-24.4422
-0.45395
-21.6208
-0.48324
-22.2542
-1.45412
-25.9649
-1.47416
-25.9552
-2.11501
-24.3204
-1.99994
-24.5384
-2.78021
-24.2293
-2.74201
-24.3811
-1.50121
-28.0541
-1.62629
-27.9598
NIKKEI
-2.10171
-26.2219
-2.11963
-26.2021
S&P
-2.20543
-26.5101
-2.13294
-26.5379
TSX
-1.24247
-28.0615
-1.38141
-27.9087
-3.440419
-2.865874
-2.569136
-3.440435
-2.865881
-2.56914
-3.440387
-2.86586
-2.569128
-3.4404
-2.86587
-2.56913
KSE
SENSEX
ASPI
AORD
CAC 40
FTSE
IBEX
Critical Values
1%
5%
10%
Augmented dickey fuller test and Phillips perron test reveal that the time series is not stationary
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at the level but stationary at 1st difference level.

Multivariate Co integration Analysis Trace Statistics
Table 4.4
Hypothesis
KSE
SENSEX
COLOMBO
AORD
CAC 40
FTSE
IBEX
NIKKEI
S&P
TSX
r = 0*
r 1*
r2
r3
r4
r5
r6
r7
r8
r9
Eigen Value
0.145648
0.088644
0.070893
0.063824
0.033426
0.027612
0.017539
0.010526
0.008307
0.003081
Trace Statistics
312.5418
212.4277
153.3932
106.6269
64.68157
43.05951
25.25133
13.99760
7.267852
1.962558
Critical Value
5%
239.2354
197.3709
159.5297
125.6154
95.75366
69.81889
47.85613
29.79707
15.49471
3.841466
Remarks
Trace test shows
2cointegrating
equations at the
0.05
level
At the 5% significant level there are 2 co integrating equations. The multivariate analysis shows
that the stock markets are integrated.
Bivariate Co-Integration (KSE)
Table 4.5
Hypothesis
KSE- AORD
KSE-CAC 40
KSE-FTSE
KSE-IBEX
KSE-NIKKEI
KSE-S&P
KSE-TSX
Eigen Value
Trace Statistics
Critical Value
r=0
r1
0.008241
7.519592
15.49471
0.003542
2.256833
3.841466
r=0
r1
0.009964
8.359232
15.49471
0.003125
1.990412
3.841466
r=0
r1
0.021182
15.69886
15.49471
0.003269
2.082461
3.841466
r=0
r1
0.006629
6.830023
15.49471
0.00408
2.599869
3.841466
r=0
r1
0.009215
8.402998
15.49471
0.003947
2.515343
3.841466
r=0
r1
0.011658
10.08032
15.49471
0.004115
2.622512
3.841466
r=0
r1
0.012372
10.47459
15.49471
0.004013
2.557203
3.841466
Remarks
No cointegration
No cointegration
No cointegration
No cointegration
No cointegration
No cointegration
No cointegration

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The results shows that Pakistani stock exchange is not cointegrated with Australian, France, UK,
Japan, Spain, USA and Canada equity markets.
Bivariate Co Integration (BSE)
Table 4.6
Hypothesis
SENSEX-AORD
SENSEX-CAC 40
r=0
r1
r=0
r1
SENSEX-FTSE
r=0
r1
SENSEX- IBEX
r=0
r1
SENSEXNKKKEI
SENSEX- S&P
SENSEX- TSX
r=0
r1
r=0
r1
r=0
r1
Eigen Value
Trace Statistics
Critical Value
0.006318
4.191636
15.49471
0.000252
0.160464
3.841466
0.009221
6.07274
15.49471
0.000285
0.181058
3.841466
0.01847
12.02036
15.49471
0.000257
0.163699
3.841466
0.005235
3.342285
15.49471
6.88E-06
0.004377
3.841466
0.00767
5.254793
15.49471
0.000562
0.357686
3.841466
0.010797
7.718729
15.49471
0.00128
0.814701
3.841466
0.013753
9.03368
15.49471
0.000355
0.225819
3.841466
Remarks
No cointegration
No cointegration
No cointegration
No cointegration
No cointegration
No cointegration
No cointegration
The Table 4.6 shows that Indian stock exchange is not co integrated with Australian, France,
UK, Japan, Spain, USA and Canada equity markets. so investment in BSE SENSEX is a best
opportunity for the investors of develop countries to diversify their portfolios and minimize their
risk.
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Bivariate Co-Integration(CSE)
Table 4.7
Hypothesis
Eigen Value
Trace Statistics
Critical Value
r=0
r1
0.005857
3.844433
15.49471
0.00017
0.108132
3.841466
COLOMBO-CAC
40
r=0
r1
0.021299
14.14886
15.49471
0.000717
0.456482
3.841466
COLOMBO-FTSE
r=0
r1
0.032161
21.05866
15.49471
0.000421
0.267898
3.841466
r=0
r1
0.006291
4.267632
15.49471
0.000399
0.253857
3.841466
COLOMBONIKKEI
r=0
r1
0.010979
8.350885
15.49471
0.002088
1.329564
3.841466
COLOMBO-S&P
r=0
r1
0.016857
12.49097
15.49471
0.002636
1.678603
3.841466
COLOMBO-TSX
r=0
r1
0.01302
8.856059
15.49471
0.000819
0.52121
3.841466
COLOMBO-AORD
COLOMBO-IBEX
Remarks
No cointegration
No cointegration
Co integrated
No cointegration
No cointegration
No cointegration
No cointegration
Table 4.7 describes the Bivariate co integration relationship between Colombo stock exchange
and developed stock exchange. The results shows that Colombo stock exchange is not cointegrated with Australian, France, Japan, Spain, USA and Canada equity markets but cointegrated with UK stock market. Investors of all developed countries included in this study
except UK investor has potential to make investment in Sri Lankan stock exchange and take the
advantage of diversification.
11

Null Hypothesis:
AORD does not Granger Cause KSE
KSE does not Granger Cause AORD
CAC 40 does not Granger Cause KSE
KSE does not Granger Cause CAC 40
FTSE does not Granger Cause KSE
KSE does not Granger Cause FTSE
IBEX does not Granger Cause KSE
KSE does not Granger Cause IBEX
NIKKEI does not Granger Cause KSE
KSE does not Granger Cause NIKKEI
S&P does not Granger Cause KSE
KSE does not Granger Cause S&P
TSX does not Granger Cause KSE
KSE does not Granger Cause TSX
AORD does not Granger Cause SENSEX
SENSEX does not Granger Cause AORD
CAC 40 does not Granger Cause SENSEX
SENSEX does not Granger Cause CAC 40
FTSE does not Granger Cause SENSEX
SENSEX does not Granger Cause FTSE
IBEX does not Granger Cause SENSEX
SENSEX does not Granger Cause IBEX
NIKKEI does not Granger Cause SENSEX
SENSEX does not Granger Cause NIKKEI
S&P does not Granger Cause SENSEX
SENSEX does not Granger Cause S&P
TSX does not Granger Cause SENSEX
SENSEX does not Granger Cause TSX
AORD does not Granger Cause COLOMBO
COLOMBO does not Granger Cause AORD
CAC 40 does not Granger Cause COLOMBO
COLOMBO does not Granger Cause CAC 40
FTSE does not Granger Cause COLOMBO
COLOMBO does not Granger Cause FTSE
IBEX does not Granger Cause COLOMBO
COLOMBO does not Granger Cause IBEX
NIKKEI does not Granger Cause COLOMBO
COLOMBO does not Granger Cause NIKKEI
S&P does not Granger Cause COLOMBO
COLOMBO does not Granger Cause S&P
TSX does not Granger Cause COLOMBO
COLOMBO does not Granger Cause TSX
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F-Statistics
0.25783
3.12499
1.89861
0.02131
2.0381
4.66571
0.34208
2.44861
0.19203
0.84354
0.22564
2.3697
0.4421
7.1785
0.07906
0.81492
0.52886
0.45024
0.25534
2.97084
1.78757
1.07832
2.51637
0.22026
3.78046
1.61552
2.75018
10.2953
0.41443
1.48789
10.7344
0.1514
10.9008
3.93801
1.5246
0.81988
4.52995
0.31224
6.66636
2.78428
3.08738
5.89071
Probability
0.6118
0.0776
0.1687
0.884
0.1539
0.0311
0.5588
0.1181
0.6614
0.3587
0.6349
0.1242
0.5064
0.0076
0.7787
0.367
0.4674
0.5025
0.6135
0.0853
0.1817
0.2995
0.1132
0.639
0.0523
0.2042
0.0977
0.0014
0.52
0.223
0.0011
0.6973
0.001
0.0476
0.2174
0.3656
0.0337
0.5765
0.01
0.0957
0.0794
0.0155

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Granger Causality Test

Table 4.8
Results of granger causality test indicates that KSE does not granger causes the stock returns in
other equity markets except Sensex, Ftse, Tsx. Only unidirectional causality is found from KSE
to Sensex,Ftse, Tsx. Similarly results showed that Colombo stock returns cause granger in
sensex and sensex stock returns cause granger in TSX stock returns. Results showed that Stock
Returns in Nikkei granger cause stock returns in Colombo and Stock returns in Colombo Equity
Market granger cause stock returns in TSX. The results revealed that FTSE granger cause to
Colombo stock exchange and Colombo cause granger to FTSE. However unidirectional causality
exists from CAC40 to Colombo stock returns.
Table 4.9
Period
S.E.
Variance Decomposition Analysis of KSE
KSE
(pakistan)
SENSEX
(india)
COLOMB
O
(srilanka)
AORD
(Australia
)
CAC 40
(france)
FTSE
(UK)
IBEX
(spain)
NIKKEI
(japan)
S&P
(usa)
TSX
(canada
)
0.035884
100
0.036524
98.90687
0.241973
0.284236
0.341862
0.018681
0.083699
0.037755
0.067382
0.000319
0.01722
0.036556
98.79011
0.285881
0.318461
0.352305
0.021663
0.086651
0.03769
0.068174
0.016794
0.02227
0.036557
98.78312
0.289282
0.321402
0.352607
0.021781
0.086663
0.037692
0.068187
0.016866
0.0224
0.036557
98.7828
0.289412
0.321528
0.352613
0.021782
0.086664
0.037692
0.068203
0.01688
0.02242
0.036557
98.78278
0.289423
0.321535
0.352614
0.021782
0.086664
0.037692
0.068204
0.016881
0.02242
0.036557
98.78278
0.289423
0.321536
0.352614
0.021782
0.086664
0.037692
0.068204
0.016881
0.02242
0.036557
98.78278
0.289423
0.321536
0.352614
0.021782
0.086664
0.037692
0.068204
0.016881
0.02242
0.036557
98.78278
0.289423
0.321536
0.352614
0.021782
0.086664
0.037692
0.068204
0.016881
0.02242
10
0.036557
98.78278
0.289423
0.321536
0.352614
0.021782
0.086664
0.037692
0.068204
0.016881
0.02242
13

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Table 4.9 indicates that the change in Karachi stock exchange is occurs due to innovations or
fluctuation in itself. We interpret as the other developed and developing stock markets not cause
change in KSE if any change or fluctuation or innovation occur in these stock exchange.
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Table 4.10 Variance Decomposition Analysis of BSE

KSE
SENSEX
(Pakistan)
(India)
COLMBO
TSX
AORD
CAC 40
FTSE
IBEX
NIKKEI
S&P
(Sri
Lanka)
(Australia)
(France)
(UK)
(Spain)
(Japan)
(USA)
(Canada
)
Per
iod
S.E.
0.035964
1.211264
98.78874
0.036153
1.353305
97.84841
0.195813
0.206444
0.012456
9.14E-06
0.007202
0.054484
0.283882
0.03799
0.036156
1.353086
97.83522
0.204383
0.206445
0.012542
1.14E-05
0.007578
0.05742
0.285302
0.03801
0.036156
1.353103
97.83454
0.204694
0.206492
0.012542
1.19E-05
0.007578
0.057423
0.28541
0.03821
0.036157
1.353102
97.8345
0.204714
0.206494
0.012542
1.33E-05
0.007578
0.057424
0.285411
0.03822
0.036157
1.353102
97.8345
0.204715
0.206494
0.012542
1.33E-05
0.007578
0.057424
0.285411
0.03822
0.036157
1.353102
97.8345
0.204715
0.206494
0.012542
1.33E-05
0.007578
0.057424
0.285411
0.03822
0.036157
1.353102
97.8345
0.204715
0.206494
0.012542
1.33E-05
0.007578
0.057424
0.285411
0.03822
0.036157
1.353102
97.8345
0.204715
0.206494
0.012542
1.33E-05
0.007578
0.057424
0.285411
0.03822
10
0.036157
1.353102
97.8345
0.204715
0.206494
0.012542
1.33E-05
0.007578
0.057424
0.285411
0.03822
The table 4.10 indicates that the change in Bombay stock exchange (sensex) explained by due to
its own innovations or fluctuation. In the other way we interpret as the other developed and
developing stock markets not cause change in Bombay stock exchange (Sensex) if any change or
fluctuation or innovation occur in these stock exchange.
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Table 4.11Variance Decomposition Analysis of CSE
Peri
od
S.E.
KSE
(pakistan)
SENSEX
(india)
COLOMBO
(srilanka)
AORD
(Australia)
CAC 40
(france)
FTSE
(UK)
IBEX
(spain)
NIKKEI
(japan)
S&P
(usa)
TSX
(canada
)
0.028804
0.005394
0.362819
99.63179
0.02964
0.030621
2.583574
96.01739
0.014807
0.151848
0.039082
0.00626
0.592714
0.034914
0.52879
0.029687
0.040382
2.730224
95.80453
0.035659
0.152015
0.040776
0.006243
0.600124
0.061184
0.52886
0.029688
0.04038
2.732398
95.80165
0.035814
0.152094
0.040819
0.006268
0.600563
0.061189
0.52882
0.029688
0.040387
2.732565
95.80143
0.035825
0.152094
0.040819
0.006277
0.600561
0.061197
0.52884
0.029688
0.040388
2.732572
95.80142
0.035826
0.152094
0.040819
0.006277
0.600561
0.061198
0.52884
0.029688
0.040388
2.732572
95.80142
0.035826
0.152094
0.040819
0.006277
0.600561
0.061198
0.52884
0.029688
0.040388
2.732572
95.80142
0.035826
0.152094
0.040819
0.006277
0.600561
0.061198
0.52884
0.029688
0.040388
2.732572
95.80142
0.035826
0.152094
0.040819
0.006277
0.600561
0.061198
0.52884
10
0.029688
0.040388
2.732572
95.80142
0.035826
0.152094
0.040819
0.006277
0.600561
0.061198
0.52884
The above table 4.11 indicates that the change in Colombo stock exchange explained by due to
its own innovations or fluctuation. In the other way we interpret as the other developed and
developing stock markets not cause change in Colombo stock exchange if any change or
fluctuation or innovation occur in these stock exchange.
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Table 4.12Error Correction Model

Dependent variable is dPAK
637 observations used for estimation from 2 to 638
Regressor
Coefficient
Standard Error
T-Ratio[Prob]
dSENSEX .0028050
.0036463
.76925[.442]
dCOLOMBO.020186
.0073241
2.7562[.006]
dAUS .0021854
.0045320
.48221[.630]
dFRNCE.22426
.048795
4.5960[.000]
dUK -.022703
.020701
-1.0967[.273]
dSPAIN
.051469
.018462
2.7878[.005]
dJPN -.077878
.034026
-2.2888[.022]
dAMRCA .12608
.027025
4.6652[.000]
dCANADA.52344
.039028
13.4117[.000]
ecm(-1)
-.12410
.017035
-7.2854[.000]
List of additional temporary variables created:
dPAK = PAK-PAK(-1)
dSENSEX = SENSEX-SENSEX(-1)
dCOLOMBO = COLOMBO-COLOMBO(-1)
dAUS = AUS-AUS(-1)
dFRNCE = FRNCE-FRNCE(-1)
dUK = UK-UK(-1)
dSPAIN = SPAIN-SPAIN(-1)
dJPN = JPN-JPN(-1)
dAMRCA = AMRCA-AMRCA(-1)
dCANADA = CANADA-CANADA(-1)
ecm = PAK -.022602*SENSEX -.16266*COLOMBO -.017609*AUS + .075488*FRNCE +
.18294*UK -.41473*SPAIN -.30712*JPN + .053244*AMRCA -.51731*CANADA
R-Squared
.53392 R-Bar-Squared
.52419
S.E. of Regression
.018611 F-stat. F( 9, 627) 79.2963[.000]
Mean of Dependent Variable .6049E-3 S.D. of Dependent Variable .026980
Residual Sum of Squares
.21578 Equation Log-likelihood
1641.0
Akaike Info. Criterion
1627.0
Schwarz Bayesian Criterion 1595.8
DW-statistic
2.3662
The results of error correction model indicates that coefficient of ECM(-1) value is -.12410.
which means that the Adjustment process is low and 12.41 percent of the previous years
disequilibrium in share prices from its equilibrium path will be corrected this year. The result
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shows that American, French, Spanish and Canadian equity markets show no relationship with
Karachi stock market in long run but these equity markets are statically significant in short term.

Dependent variable is dSENSEX
Regressor
Coefficient
Standard Error
T-Ratio[Prob]
dCOLOMBO
.12047
.041197
2.9242[.004]
dAUS .025862
.0085624
3.0204[.003]
dFRNCE .039406
.023806
1.6553[.098]
dUK.0036160
.039378
.091829[.927]
dSPAIN -.0016270
.035451
-.045894[.963]
dJPN -.0010339
.026625
-.038832[.969]
dAMRCA.032952
.016544
1.9917[.047]
dCANADA -.0017437
.026311
-.066273[.947]
dPAK -.073771
.033259
-2.2181[.027]
ecm(-1)
-.024472
.0068550
-3.5699[.000]
dAUS = AUS-AUS(-1)
dUK = UK-UK(-1)
dJPN = JPN-JPN(-1)
dPAK = PAK-PAK(-1)
ecm = SENSEX -.32625*COLOMBO -1.0568*AUS -1.6103*FRNCE -.14776*UK +

.066486*SPAIN + .042247*JPN -1.3465*AMRCA + .071254*CANADA + 3.0145*PAK
R-Squared
.035274
S.E. of Regression
.035596 F-stat. F( 9, 627) 3.6949[.000]
Mean of Dependent Variable .0038244 S.D. of Dependent Variable .036241
.79318 Equation Log-likelihood
1226.4
1215.4 Schwarz Bayesian Criterion 1190.9
DW-statistic
1.7264
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The results of error correction model indicate that coefficient of ECM (-1) value is -.02447. This
means that the Adjustment process is low and 02.44 percent of the previous years
shows that Australian and American equity markets show no relationship with Bombay stock
market in long run but these equity markets are statically significant in short term.
Dependent variable is dCOLOMBO
Regressor
Coefficient
Standard Error
T-Ratio[Prob]
dSENSEX.0052678
.0056378
.93438[.350]
dAUS .0060010
.0070269
.85400[.393]
dFRNCE
.50747
.074495
6.8121[.000]
dUK -.018855
.032149
-.58647[.558]
dSPAIN -.0024261
.028733
-.084436[.933]
dJPN .25361
.047453
5.3443[.000]
dAMRCA -.017365
.013581
-1.2787[.201]
dCANADA -.019410
.021332
-.90991[.363]
dPAK
.22845
.055122
4.1445[.000]
ecm(-1)
-.035474
.011456
-3.0966[.002]
dAUS = AUS-AUS(-1)
dUK = UK-UK(-1)
dJPN = JPN-JPN(-1)
dPAK = PAK-PAK(-1)
ecm = COLOMBO -.14850*SENSEX -.16916*AUS -.68700*FRNCE + .53150*UK +
.068390*SPAIN -.52220*JPN + .48952*AMRCA + .54717*CANADA -1.0223*PAK
R-Squared
.35270
S.E. of Regression
.028839 F-stat. F( 9, 627) 39.8378[.000]
Mean of Dependent Variable .0018166
S.D. of Dependent Variable .035845
.51897
Equation Log-likelihood 1361.5
1348.5 Schwarz Bayesian Criterion 1319.6
DW-statistic
2.0703
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The results of error correction model indicate that coefficient of ECM (-1) value is -.03547. This
means that the Adjustment process is low and 03.47 percent of the previous years
shows that Japanese equity markets show no relationship with Colombo stock market in long run
but these equity markets are statically significant in short term. The UK equity market
integratedin long run and also in short run UK equity market statically significant with Colombo
stock market in short term.
CONCLUSION
In this study we take major south Asian stock markets and developed stock markets. No doubt
there is diversity in the social, economic and political environment in these both type of south
Asian and developed country, in spite of that this study investigate whether these countries stock
markets have closely integrated or not.This study reveals that Karachi stock exchange is more
volatile than other stock exchanges because it shows high return at high risk. As compare to
KSE, Colombo stock exchange shows low return comparatively at low at low risk, TSX and
FTSE shows low return at low risk. So high level of returns in the emerging equity markets
(including KSE,SENSEX,CSE) attract full for the investors who wants to make investments in
the equity markets. This study aimed to help the investors in decision making about the
investments. This study help full for investors that they can get the advantage diversification and
reduce the unsystematic risk by investing in the international equity markets. So ADF and PP
tests are used for the stationary of data and found that data is integrated at same order. Bivariate
co integration which indicates that KSE and BSE also not show co movements with developed
stock markets in the long run. The resutls of the impulse response function shows standard
deviation change in a market because of one standard deviation change in other market. Resutls
the response of KSE to the changes in the developed equity markets.
Results showed that
change in NYSE brings change in KSE. However, results of Impulse Response Function shows
that KSE,BSE and CSE returns are not influnced by the shocks in the other marekts. Finally it is
conclude that the investors can minimize their country systematic risk by making investment in
the developed equity markets and emerging equity markets. This study support to the Hassan et
al.(2009) and Hussain et al.(2012) concluded that major south Asian markets including India and
Pakistan equity markets are independent.
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APPENDIX
Annexure I
Impulse response
Response to Cholesky One S.D.Innovations 2 S.E.
Response of SER01 to SER01
.04
.04
.04
.04
.04
.04
.04
.04
.04
.04
.02
.02
.02
.02
.02
.02
.02
.02
.02
.02
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.02
-.02
2
10
-.02
2
10
-.02
2
10
-.02
2
10
-.02
2
10
-.02
2
10
-.02
2
10
.00
-.02
2
10
-.02
2
10
.04
.04
.04
.04
.04
.04
.04
.04
.04
.04
.02
.02
.02
.02
.02
.02
.02
.02
.02
.02
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.02
-.02
2
10
-.02
2
10
-.02
2
10
-.02
2
10
-.02
2
10
-.02
2
10
-.02
2
10
10
10
.04
.04
.04
.04
.04
.04
.04
.04
.04
.02
.02
.02
.02
.02
.02
.02
.02
.02
.02
.00
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.02
-.02
-.02
-.02
-.02
-.02
-.02
-.02
-.02
-.02
10
10
10
10
10
10
10
10
10
.02
.02
.02
.02
.02
.02
.02
.02
.02
.01
.01
.01
.01
.01
.01
.01
.01
.01
.01
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
10
10
.02
.02
.02
.02
.02
.02
.02
.02
.02
.01
.01
.01
.01
.01
.01
.01
.01
.01
.01
.00
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.01
-.01
-.01
-.01
-.01
-.01
-.01
-.01
-.01
-.01
10
10
10
10
10
10
10
10
10
.015
.015
.015
.015
.015
.015
.015
.015
.015
.010
.010
.010
.010
.010
.010
.010
.010
.010
.010
.005
.005
.005
.005
.005
.005
.005
.005
.005
.005
.000
.000
.000
.000
.000
.000
.000
.000
.000
-.005
2
10
-.005
2
10
-.005
2
10
-.005
2
10
-.005
2
10
-.005
2
10
-.005
2
10
10
10
.03
.03
.03
.03
.03
.03
.03
.03
.03
.02
.02
.02
.02
.02
.02
.02
.02
.02
.02
.01
.01
.01
.01
.01
.01
.01
.01
.01
.00
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.01
-.01
-.01
-.01
-.01
-.01
-.01
-.01
-.01
-.01
10
10
10
10
10
10
10
10
10
.03
.03
.03
.03
.03
.03
.03
.03
.03
.02
.02
.02
.02
.02
.02
.02
.02
.02
.02
.01
.01
.01
.01
.01
.01
.01
.01
.01
.01
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
10
10
.02
.02
.02
.02
.02
.02
.02
.02
.02
.01
.01
.01
.01
.01
.01
.01
.01
.01
.01
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
10
10
.02
.02
.02
.02
.02
.02
.02
.02
.02
.01
.01
.01
.01
.01
.01
.01
.01
.01
.01
.00
.00
.00
.00
.00
.00
.00
.00
.00
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
-.01
2
10
10
10
10
10
10
.00
-.01
2
10
.02
-.01
-.01
2
.00
-.01
2
.02
-.01
10
-.01
2
.00
-.01
2
.03
-.01
.01
10
.03
-.005
2
.000
-.005
2
.015
-.005
10
.02
-.01
2
.00
-.01
2
.02
-.01
10
.04
-.02
2
.00
-.02
2
-.01
2
10
10
(Here Ser01 represents Kse, Ser02 represents Bse,Ser03 represents Cse,Ser04 represents the AORD, Ser05 represents the
CAC40,Ser06 represents FTSE,Ser07 represents IBEX,Ser08 represents NIKKEI,Ser09 represents the S&P.Ser10 represents
TSX.)
ISSN: 2231-0703
23

Long Run Relationship Between South Asian Equity Markets and Equity Markets of Developed World PDF

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International Journal of Management and Strategy

(IJMS) 2012, Vol. No.3, Issue 5, July-Dec.2012