Abstract

This study investigates the long-term relationship between stock markets in developing countries
and those in developed nations. We analyzed weekly stock market data from January 2017,
sourced from Investing.com. The developing countries included in our study are Pakistan, India,
and Bangladesh, while the developed countries are the United Kingdom, the United States, and
China. Lower frequency data, such as monthly or quarterly, was not used due to its limitations.
The market indices examined are the KSE 100 (Pakistan), the S&P BSE 100 (India), the
Shanghai Composite (China), the NYSE (United States), and the Dhaka Stock Exchange
(Bangladesh). To explore relationships between these markets, we employed various methods
including descriptive statistics, the Granger causality test, the Augmented Dickey-Fuller (ADF)
test, the Phillips-Perron test, the Johansen test of cointegration, impulse response analysis, and
variance decomposition. We applied ARCH (Autoregressive Conditional Heteroskedasticity) and
GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models to assess market
volatility. Our results reveal the long-term relationship between the stock markets of developed
and developing countries. Additionally, we found that the NYSE exhibits higher volatility, while
the Indian stock market shows lower volatility. These findings are useful for investors and
policymakers, as they highlight the potential benefits of diversifying investments and managing
unsystematic risk, given the lack of cointegration between these markets.

Introduction
Established Stock markets contribute to a notable shift in the economy. Only a strong economy
gives higher returns to investors with minimum risk while weak economies give low returns with
a high level of risk. Several equity markets show different behaviors; some show low volatility
and some show higher volatility. Developed and emerging markets have different behaviors
because both markets have different prices. All investors have different levels of risk some
investors are risk averse and some investors are risk takers.

The investors take risks at a certain level. The developed and developing countries' securities
have different nature of volatility. Beta defines the sensitivity of security. If security has a high
beta, it means this security has a high return as well as a high level of risk. Investors try to invest
in that security which gives them high returns. Return on investment portfolio increases only
when stock prices rise and stock prices rise when both developed and emerging market volatility
is low (Yousaf and Majid). Investors Invest in both developed and developing markets because it
helps spread the risk, as these markets often perform differently in various economic conditions.
This diversification will help to reduce overall portfolio risk and increase potential returns.

The previous studies investigated the volatility in different stock markets during previous lags
among Hongkong, Pakistan, Japan, and India but their focus was on interest rates (Subhani et al).
Stock prices move in different patterns sometimes prices are in the upward direction and
sometimes in the downward direction. Primary and secondary trends help in predicting the
change in the price of the stock market (Dow theory).

Fluctuations in the stock market influence many factors directly and indirectly. These factors
include exchange rate, interest rate, etc. Changes in governmental monetary policies result in
variations in interest rates which affect the stock market returns. When the rate of interest rises it
impacts the business and individuals. Due to the increase in interest rates, the stock market
becomes risky because the cost of borrowing also increases. Investors prefer to save money in
savings accounts rather than investing in stock markets. High interest rate affects businesses. The
cost of borrowing rises and businesses are incapable of investing in markets which directly
affects profitability.

Due to a decrease in profitability, it directly affects the prices of equity markets. It would be a
negative for equity markets because investors will not invest in the equity markets. When the
central bank raises the interest rate the government securities such as bonds and T bills become
trendy in the investors. The stock market is a very helpful platform for investors and borrowers.
It provides funds at a low interest rate. The world become a global village. Due to globalization,
the barriers to the trade have fallen and companies are making across-border investments for
their profit maximization and shareholders wealth.

Globalization has increased the opportunities for investors and it has decreased the level of risk.
It will be helpful for investors to diversify their portfolio of investments. Markowitz's modern
portfolio theory has proven beneficial for investors. This theory helps investors to diversify their
investments while putting all their eggs in one basket. Diversification works best when the asset
classes in the portfolio have a low correlation with each other. If assets are correlated it would
not be helpful for investors to diversify their risk. When investors invest in foreign markets, they
will enjoy the diversification benefits which will compensate against the domestic market risk.
Overview of the Equity Markets

The Karachi Stock Exchange Limited was founded on September 18, 1941. It was the largest as
well as oldest stock exchange in South Asia by many Pakistani partnerships as well as at the
international level. Moreover, in 2002 Karachi Stock Exchange was recognized as the best-
performing stock market in the world. Additionally, Bloomberg placed Pakistan third in 2014
among the top 10 best performing Stock markets in the world. on December 8, 2009, 654
companies were cataloged with a market capitalization of rs.8.561 trillion having indexed capital
of rs.2805.873 billion. It includes the KSE 30 index, the KSE ALL SHARE INDEX, and the
KMI 30 index. KSE is now integrated into the Pakistan Stock Exchange.

The Bombay Stock Exchange, the most ancient stock exchange in Asia was established in 1875.
It was recognized by the Indian government under the Securities Contracts Regulation Act on
August 31, 1957. It is also known as the 11th Largest stock exchange in the world. As of January
23, 2015, its market capitalization is 1.7 trillion. More than 5500 companies are listed on BSE.
The BSE SENSEX index or BSAE 30 was developed in 1986. It is used to gauge the overall
performance of the exchange and is also a partner exchange with the UN Sustainable Stock
Exchange.

London Stock Exchange which was created in 1801 is located in London in the United Kingdom.
It has a total market value of 6.06 trillion hence being the world’s third-largest stock exchange.
Indices included are the FTSE 100 index, FISE 250 index, FISE 350 index, FTSE small cap
index, and FTSE all share index. The FTSE index also known as the Financial Times Stock
Exchange is a share index of the hundred companies listed on LSC with the highest market
capitalization. The index is regulated by the FTSC group which consists of the largest hundred
qualifying UK companies by full market value.

The New York Stock Exchange is the largest in the world is an American stock exchange also
known as Big Board and was founded on March 8, 1871. It has a market capitalization OF 9.69
trillion as of May 2015. The average daily trading value was approximately 169 billion in 2003.
Its indices are the Dow Jones Industrial Average, S&P 500 and NYSE Composite, The
Standard&Poors 500 is an American stock market index having a market capitalization of 500
large companies having a common stock listed on the NYSE.

The Dhaka Stock Exchange (DSE), founded in 1954, is Bangladesh's main stock exchange and
one of the oldest in South Asia. Situated in Dhaka, the nation's capital, it acts as the central hub
for trading various securities such as shares, bonds, and other financial instruments. The primary
index of the DSE, known as the DSEX, was introduced in 2013 and tracks the performance of
the top 30 listed companies, providing a gauge of the market's overall health. The DSE operates
under the regulatory supervision of the Bangladesh Securities and Exchange Commission
(BSEC), ensuring fair and transparent trading practices. It uses a fully automated trading system,
which increases efficiency and makes the market more accessible to a broad range of
participants, including individual and institutional investors, companies from various sectors, and
licensed brokers. Over the years, the DSE has seen considerable growth in both market
capitalization and the number of listed companies. This growth has been bolstered by ongoing
regulatory reforms and advancements in technology. By facilitating capital formation and
offering a multitude of investment opportunities, the DSE plays a crucial role in the economic
development of Bangladesh and serves as a key indicator of the country's financial health.

Literature Review

Mansoor et al (2019) explored the study on Islamic stock markets and developed market
volatility from 2000 to 2016 daily. The tests used are ARCH, augmented dickey fuller test ADF,
TGARCH, EGARCH, and GARCH. The findings show that the developed markets show
negative returns compared to the forgoing and Islamic markets show positive returns compared
to the previous day except for Poland and Spain. The study concluded that various factors
influence the volatility of equity markets and the volatility of all stock markets transfers to the
upcoming day. This study will help make portfolios and for investors' decision-making.

Johanson Ljungwall (2009) examined the relationship among China’s equity markets, Taiwan,
and Hong Kong. The data was collected from 1994 to 2005. The results show that there is no
long-run relationship among the markets. Short-term spillover affects the volatility and return in
the region. There is a mean spillover effect from Taiwan to Hong Kong and China. Hong Kong
volatility affects Taiwan and subsequently impacts the mainland China market. The findings
show that these three stock markets are interrelated. The results are helpful for investors who
want to invest in these markets.

Khedekar Zia Islam (2015) conducted a study to check the behavior of emerging and developed
countries in the Great Financial Crisis in terms of co-movement and historical stock volatility.
The data from three developed and three Asian emerging markets from 2001 to 2012 are
employed. The emerging markets from Asia were taken based on their previous performance
market capitalization and growth rate and developed markets were selected based on
geographical location and size. The methodology used is R-square estimates and a standard
historical volatility model.

Mansoor Bilal Aslam (2016) investigated the long-term connection between the developed stock
markets and frontier stock markets for the period of 2000-2014 by using weekly data. The data
was examined using variance decomposition, descriptive statistics, granger causality, correlation,
Augmented Dickey-Fuller test, Philips Perron test, Johnson and Jelsilius test of cointegration,
and Impulse response. The result of this study reveals that there is no long-run relationship
between developed and frontier equity markets. These findings would be helpful for investors to
diversify their portfolios.

Thai Hung (2018) explored the study on the volatility and return of Asian countries like Vietnam,
Malaysia, Thailand, Singapore, and China. The data was collected from 2000 to 2018 by taking
values daily. The samples are distributed into two parts pre-global financial crisis and post-
financial crisis. The tests employed are the BEKK-GARCH model and the vector autoregression
model. The study investigated that China has a greater impact on the four Asian countries and
this would be helpful for the institutional investors and portfolio managers.

Lamba (2005) conducted the study of long-run and short-run relationships between the
developed and developing countries Pakistan India Sri Lanka for the period of 1997-2003.
Vector error correction modeling and multivariate cointegration tests were us to analyze data.
Mwaanga and Njebele (2017) researched the relationship between stock prices and exchange
rates for the time of 2004-2016. To examine the relationship between exchange rate and stock
price we utilized the Auto Regression Distribution Lag (ARDL) and Vector Autoregression
(VAR). The cointegration test results find that there is a long-run relation between the Zambia
exchange rate and the Luse index. Auto Regression Distribution Lag (ARDL) reveals that its
effect is insignificant. Results would be helpful for investors and policymakers.

Angela Liu and Shinu Pan (1997) explored the study of the volatility spillover effect and mean
return of Asian countries from American and Japanese stock markets. Asian countries include
Thailand Hongkong Taiwan and Singapore. The methodology where used is the GARCH model.
The data was analyzed from 1984 to 1991.

Palmalai, M, and Devakumar (2013) investigate the study of whether eleven emerging countries'
stock markets are linked together or not. The cointegration tests are used to check the long-term
relationship and the vector error correction model is employed to verify how markets have an
impact on one another. Jusilius and Johnsen cointegration, variance decomposition, vector error
correction model (VECM), and Granger causality are used to investigate the linkage among
markets. Cointegration test results found that there exists arbitrage which brings these countries
into long-link. The findings revealed that investors can spread their portfolios in the short run.

Xiong and Han (2015) conducted a study to examine the volatility spillover in the stock markets
and foreign exchange markets after the reform of the RMB exchange mechanism. GC-MSV
model was used to verify the volatility spillover in the foreign exchange markets and stock
markets. The findings revealed that there is asymmetric volatility and negative correlation in the
stock and foreign exchange markets. The study concludes that the RMB can affect the
equilibrium of the economy.

Sehgal, Bijoy, and Saini (2019) explored the study of spillover effects and stock market
connections among 12 Asian countries. The data were collected from 2000 to 2017 and the tests
administered are Diebold Yilmaz and ADCC-GATCH model. The results conclude that
Singapore has a high correlation with other markets. The results of Diebold Yilmaz found that
Singapore is a dominant market concerning volatility spillover and return. This study would be
helpful for policymakers and investors.

Tabash et al (2023) examined the study of volatility and return in emerging and developed
markets during periods of the Global Financial crisis and Covid-19. Data was collected from
2007 to 2021, there were two sample periods one from 2007-2009 and the second is 2019-2021.
The methodology used is unit root test GARCH, TGARCH, and EGARCH. The results interpret
that the global financial crisis has a great impact on emerging markets and covid-19 has a great
impact on developed markets.

Nazir et al (2010) investigate the determinants of equity market spillover in the Karachi stock
market. The data was gathered from 2003-2008 and annual reports from KSE100. The data was
examined using leverage, earning volatility, and payout ratio. The findings showed a significant
in KSE price volatility and dividend policy.

Qayyum Kemal (2006) investigate the stock market and international market volatility spillover
in Pakistan. The data was collected from 1998 through 2006. To find a long-term relationship
EGARCH model and volatility spillover are employed. The cointegration indicates that there is
no long-term relationship but the volatility spillover results revealed that the behaviors of both
markets are linked. If there is an increase in the price of one market it has an impact on the
volatility of other markets.

Babar Zaheer But (2010) explored the study of stock returns and economics. The data was
collected from 9 different industries listed on KSE100 which includes 79 firms. The data was
examined by using augmented dickey fuller (ADF), regression, descriptive statistic, Garch, and
Philips Perron. The results indicate that there should be a significant relation between return and
risk and change in volatility with time. The study will assist investors to spread their risk in
different markets.
Chaudri (1997) investigated the long-term relationship between US stock markets and six Latin
American markets. The data was collected from 1985 to 1993. Cointegration and vector error
correction models were utilized to verify the long-term relationship. The results found that there
is a long-run relationship between Latin American exchanges and US markets.

Subhani et al (2011) examined the volatility of returns by applying GARCH. The variables were
the currency exchange rate and interest rate. The variable’s data were collected from Yahoo
Finance. The ARCH and GARCH techniques were employed. The results show that volatility is
present in both the exchange rate and interest rate. Because these variables influence the stock
market prices this study will be helpful for investors to measure the degree of risk.

Tripathi and Sethi (2012) investigate the study of long-term and short-term relationships between
the Indian market with emerging markets like Poland, South Africa, Brazil, Taiwan, and Mexico.
The data was collected from 1992 to 2009. The results show that the Indian market is volatile
with other countries and this volatility has increased over the study period.

Shehzad et al (2014) investigated the study of Asian equity markets' cointegration with the
Pakistani stock market. The data was collected from 2001 through 2013 taking values monthly.
The tests used are correlation, descriptive statistic, VECM, VAR, cointegration test, and unit root
test. Results revealed that there is no cointegration in Taiwan, Japan, Taiwan, and China markets.
The results find that KSE and China correlate. The study concludes that Chinese investors have
the opportunity to invest in these markets.

Aslam et al (2012) estimated the relationship of KSE with developed equity markets during the
period of 1999-2012. The values of stock prices were taken weekly. The data was examined by
using the unit root, Granger causality, and unrestricted cointegration rank test. The results find no
cointegration among the markets and the Karachi stock exchange has weekly correlations with
the developed market.

Methodology
In this research, we examine the volatility of equity markets, the weekly
record of developed and developing countries' stock markets is collected
using the source Investing.com from January 1 st, 2017 to June 30th, 2023.
Developing countries such as Pakistan, India, and Bangladesh while
developed nations include the United Kingdom, America, and China. Weekly
data is utilized to investigate the volatility of stock markets because a lower
frequency (monthly, quarterly, or annually) does not provide an adequate
depiction of volatility. The market indices selected for each country are KSE
100 (Pakistan), FTSE (United Kingdom), Shanghai (SSE), NYSE(America),
Dhaka Stock Exchange (DSE), and S&P BSE 100 (India). In this research,
ARCH and GARCH techniques are used to investigate stock market volatility.
ARCH and GARCH are commonly used in various research to measure stock
market volatility. ARCH is one of the best techniques for this purpose. ARCH
and GARCH were also utilized by Low, Ibrahim, and Huang (2005) in their
study. ARCH is applied when there is an issue with both autocorrelation and
heteroscedasticity. So, the initial step is to assess autocorrelation and
heteroscedasticity.

Country Sample Period

China 01-01-2017 to 06-31-2023
India 01-01-2017 to 06-31-2023
Bangladesh 01-01-2017 to 06-31-2023
Pakistan 01-01-2017 to 06-31-2023
United Kingdom 01-01-2017 to 06-31-2023
United States 01-01-2017 to 06-31-2023

Hypothesis:

H1: There is a significant long-run relationship between the developed and

emerging markets.
H2: There is a significant and long-run relationship between BSEL and FTSE.

H3: There is a significant and long-run relationship between BSEL and KSE.

H4: There is a significant and long-run relationship between BSEL and

Shanghai.

H5: There is a significant and long-run relationship between DHAKA and KSE.

H6: There is a significant and long-run relationship between DHAKA and

FTSE.

H7: There is a significant and long-run relationship between DHAKA and

Shanghai.

H8: There is a significant and long-run relationship between NYSE and KSE.

H9: There is a significant and long-run relationship between NYSE and FTSE.

H10: There is a significant and long-run relationship between NYSE and

Shanghai.

Results:

Descriptive statistic
BSEL DHAKA FTSEPRICE KSE_PRICE NYSE_PRICE SHENGAII
Mean 341.1606 5710.031 7150.27 41653.57 13805.26 3173.506
Median 278.725 5706.545 7302.68 41825.09 13157.75 3211.74
Maximum 942.2 7342.96 8004.36 52636.87 17297.7 3703.11
Minimum 99 3953.38 5190.78 28109.57 9133.2 2493.9
Std. Dev. 190.5787 766.8128 528.6238 4465.317 1798.24 267.9673
Skewness 1.098937 -0.26762 -1.380272 -0.551036 0.287358 0.369561
Kurtosis 3.381379 2.705193 4.545269 3.275409 1.93909 2.577893
Jarque- 69.25069 5.196478 139.2843 17.95824 20.26026 10.08228
Bera
Probability 0 0.074404 0 0.000126 0.00004 0.006466
The table indicates the descriptive statistics. The table shows the mean, median, standard
deviation, maximum, minimum, skewness, and kurtosis. The results find that the New York
Stock Exchange and Pakistan Stock Exchange 100 have high returns. In terms of standard
deviation Pakistan Stock Exchange shows a higher rate of return which distinguishes it from
other markets. Therefore, we conclude that the Pakistan stock exchange is the higher and riskier
stock market.

Correlation technique
BSEL DHAKA FTSE_PRICE KSE_PRICE NYSE_PRICE SHANGHAI
BSEL 1
DHAKA 0.775805 1
FTSE-100 0.453277 0.543671 1
KSE100 0.380361 0.511585 0.26779719 1
NYSE 0.616502 0.654454 0.29720022 0.38140678 1
SHANGHAI 0.388743 0.547265 0.0772379 0.56863788 0.61897929 1

The table shows the correlation among the markets. It represents that the stock markets have a
positive correlation with each other. There exists a long-term relationship among the different
stock markets which means there is no diversification.

Unit Root Test

ADF ADF PP PP
Level 1st DIF Level 1st DIF
India -17.199 -11.7227 -17.319 -44.7645
Bangladesh -14.45 -11.2952 -14.6249 -82.1215
New York -19.1079 -12.8181 -19.5048 -159.982
UK -18.3965 -11.7365 -18.4251 -176.275
Pakistan -16.8403 -11.9046 -16.8161 -128.597
China -19.3453 -13.2527 -19.4037 -150.993
Critical Value
1% -3.44986 -3.45029 -3.44986 -3.44992
 5% -2.87003 -2.87022 -2.87003 -2.87006

10% -2.57136 -2.57146 -2.57136 -2.57138

The table shows that the Augmented Dickey-Fuller test and Phillips-Perron test find that the data
is nonstationary at the level but stationary at the first difference.

Multivariate cointegration
Eigenvalue Eager max Trace Critical Remarks
statistic value
India none 0.078497 112.7985 412.7849 95.73566 Co-integrated
Bangladesh At most 1 0.060870 81.27351 299.9864 69.88819 Co-integrated
New York At most 2 0.051101 75.29428 218.7129 47.85613 Co- integrated
UK At most 3 0.026018 64.88707 143.4186 29.79707 Co- integrated
Pakistan At most 4 0.017785 50.54544 78.53153 15.49471 Co- integrated
China At most 5 0.001252 27.98609 27.98609 3.841466 Co- integrated

Table represents multivariate cointegration which finds that there exists three cointegration
equations at the 0.05 level.

Eigenvalue Statistic Critical value Prob**. Remarks

India-China 0.042848 17.92843 15.49471 0.0211 No

cointegration
0.010644 3.520626 3.841466 0.0606

India- Pakistan 0.023828 10.72714 15.49471 0.2288 No

cointegration
0.008453 2.792773 3.841466 0.0947

India-UK 0.025904 10.75522 15.49471 0.227 No

 0.006424 2.120306 3.841466 0.1454 cointegration

Bivariate Cointegration of India

Results show that there is no cointegration relationship between the Indian stock exchange with
China, Pakistan, UK, which is beneficial for investors to diversify their portfolios.

Bivariate cointegration of Bangladesh

Eigenvalue Statistic Critical Prob** Remarks
value
Bangladesh- 0.026696 12.11822 15.49471 0.1513 No
China cointegration
0.009727 3.215717 3.841466 0.0729

Bangladesh- 0.021102 10.15944 15.49471 0.2687 No

Pakistan cointegration
0.009506 3.142417 3.841466 0.0763

Bangladesh- 0.048818 19.94811 15.49471 0.01 No

UK cointegration
0.010527 3.481601 3.841466 0.0621

The table shows that there is no cointegration between the Bangladesh stock market and China,
Pakistan, and the UK. It encourages portfolio managers to diversify.

Bivariate cointegration of New York

Eigenvalue Statistic Critical Prob** Remarks
value
New York - 0.026243 11.04101 15.49471 0.2090 No
China cointegration
0.006942 2.291856 3.841466 0.1301

New York - 0.013960 4.921838 15.49471 0.8171 No

Pakistan cointegration
0.000901 0.296647 3.841466 0.5860

New York - 0.042688 14.77415 15.49471 0.0640 No

 UK cointegration
0.001279 0.421186 3.841466 0.5163

Results reveal that the New York Stock Exchange is not cointegrated with China, the UK, and
Pakistan, which encourages investors and shareholders to diversify their portfolios.

Granger Causality

Null Hypothesis: F-Statistic Prob.

R_DHAKA does not Granger Cause R_BSEL 1.07107 0.3015
R_BSEL does not Granger Cause R_DHAKA 4.88107 0.0278
R_FTSE does not Granger Cause R_BSEL 2.74104 0.0988
R_BSEL does not Granger Cause R_FTSE 7.32533 0.0072
R_KSE does not Granger Cause R_BSEL 6.91671 0.0089
R_BSEL does not Granger Cause R_KSE 1.12771 0.289
R_NYSE does not Granger Cause R_BSEL 1.54014 0.2155
R_BSEL does not Granger Cause R_NYSE 7.08451 0.0082
R_SHENGAI does not Granger Cause R_BSEL 0.81048 0.3686
R_BSEL does not Granger Cause R_SHENGAI 0.23546 0.6278
R_FTSE does not Granger Cause R_DHAKA 1.76938 0.1844
R_DHAKA does not Granger Cause R_FTSE 0.69051 0.4066
R_KSE does not Granger Cause R_DHAKA 3.72531 0.0545
R_DHAKA does not Granger Cause R_KSE 0.93782 0.3335
R_NYSE does not Granger Cause R_DHAKA 2.01546 0.1567
R_DHAKA does not Granger Cause R_NYSE 4.6062 0.0326
R_SHENGAI does not Granger Cause R_DHAKA 0.24075 0.624
R_DHAKA does not Granger Cause R_SHENGAI 0.76492 0.3824
R_KSE does not Granger Cause R_FTSE 28.1852 2.00E-07
R_FTSE does not Granger Cause R_KSE 0.85736 0.3552
R_NYSE does not Granger Cause R_FTSE 11.9407 0.0006
R_FTSE does not Granger Cause R_NYSE 0.13657 0.7119
R_SHENGAI does not Granger Cause R_FTSE 0.02487 0.8748
R_FTSE does not Granger Cause R_SHENGAI 1.60343 0.2063
R_NYSE does not Granger Cause R_KSE 1.50908 0.2202
R_KSE does not Granger Cause R_NYSE 32.8863 2.00E-08
R_SHENGAI does not Granger Cause R_KSE 0.04308 0.8357
R_KSE does not Granger Cause R_SHENGAI 0.55583 0.4565
 R_SHENGAI does not Granger Cause R_NYSE 2.25439 0.1342
R_NYSE does not Granger Cause R_SHENGAI 2.20306 0.1387

The above table shows the results of Granger causality which indicate that India does not have
Granger cause in Bangladesh, the United Kingdom, and America. On the other hand, KSE does
not granger cause in India which concludes that there is only unidirectional causality exists when
we move from Pakistan to India. Bangladesh does not gather cause in America. America does not
granger cause in the United Kingdom.

Variance decomposition of BSEL

Period S.E. BSEL DHAKA FTSE_PRICE KSE_PRIC NYSE_PRICE SHENGAII

E
1 25.31785 100 0 0 0 0 0
2 35.47135 98.53052 0.5041 0.494916 0.086357 0.003543 0.380566
3 43.1033 97.59958 0.94873 0.552964 0.200513 0.002553 0.695657
4 49.45198 96.99216 1.272658 0.532621 0.229166 0.006548 0.966848
5 54.99582 96.52649 1.519838 0.492717 0.225561 0.018771 1.216625
6 59.97136 96.11806 1.72281 0.450554 0.21005 0.039948 1.458582
7 64.51411 95.73515 1.896562 0.411297 0.190825 0.069364 1.696805
8 68.71277 95.36406 2.048845 0.376328 0.171608 0.106378 1.932784
9 72.62864 94.99891 2.183962 0.345776 0.15426 0.150278 2.166812
10 76.30622 94.63722 2.30457 0.319303 0.139755 0.200394 2.398756
The table shows that developed and developing markets do not affect the Bombay Stock
Exchange if any fluctuation occurs in these stock markets. The change is due to own innovation
of the Bombay Stock Exchange.

Variance decomposition of Dhaka

Perio S.E. BSEL DHAK FTSE_PRIC KSE_PRIC NYSE_PRIC SHENGAI
d A E E E I
1 93.2973 1.90662 98.0933 0 0 0 0
2 4 8
2 143.947 0.95232 98.7001 0.139242 0.122495 0.035317 0.050496
9 9 2
4 207.869 0.82535 98.3501 0.098928 0.625653 0.070237 0.029698
2 8 3
5 230.925 1.03569 97.8877 0.131989 0.834836 0.070325 0.039361
9 6 9
6 250.739 1.35284 97.2491 0.254588 1.01733 0.067429 0.058639
 4 1 7
7 268.237 1.75747 96.4460 0.464935 1.183875 0.063781 0.083917
1 2
8 283.999 2.23734 95.4970 0.752374 1.340744 0.060255 0.11223
9 3 5
9 298.417 2.78299 94.4237 1.103673 1.49127 0.057185 0.141178
8 7
10 311.764 3.38625 93.2474 1.505427 1.637238 0.054701 0.168902
2 8

The table shows that developed and developing markets do not affect the Dhaka stock exchange
if any fluctuation occurs in these stock markets. The change is due to own innovation of the
Dhaka stock exchange.

Variance decomposition of FTSE

Period S.E. BSEL DHAK FTSE_PRIC KSE_PRIC NYSE_PRIC SHENGAI
A E E E I
1 144.704 1.59215 0.00242 98.40543 0 0 0
2 2
2 202.852 1.67633 0.39172 94.86142 2.431746 0.586486 0.052289
4 6 1
3 241.646 1.69108 0.95573 93.66558 3.082766 0.527294 0.077548
5 1 2
4 269.556 1.72886 1.47066 93.13733 3.129356 0.462811 0.070972
1 7 2
5 290.842 1.80588 1.97270 92.78116 2.977342 0.401276 0.061634
8 8
6 307.799 1.90259 2.46293 92.44813 2.771241 0.359495 0.055604
5 2 9
7 321.739 2.01330 2.94185 92.07956 2.569452 0.341485 0.054344
7 1 9
8 333.494 2.13399 3.40567 91.65965 2.39527 0.347881 0.057526
8 4 9
9 343.616 2.26248 3.85025 91.18779 2.257437 0.377824 0.064201
1 5 8
10 352.484 2.39726 4.27189 90.67019 2.15768 0.4297 0.073276
5 5 2
 The table shows that developed and developing markets do not affect the FTSE stock exchange if
any fluctuation occurs in these stock markets. The change is due to own innovation of the FTSE
stock exchange.

Variance decomposition of KSE

Period S.E. BSEL DHAKA FTSE_PRICE KSE_PRICE NYSE_PRIC SHENGAII
E
1 1037.089 0.233861 0.02579 0.497849 99.2425 0 0
3
2 1470.75 0.12856 0.12523 0.855629 98.8628 0.009802 0.017967
9
3 1774.387 0.098702 0.36016 0.697914 98.76374 0.009339 0.070141
5
4 2001.5 0.085462 0.69128 0.551008 98.4679 0.037105 0.167242
5 2181.94 0.0803 1.09617 0.484797 97.93413 0.098397 0.3062
6
6 2331.338 0.080443 1.55999 0.502242 97.18539 0.192121 0.479812
7 2458.862 0.085044 2.06923 0.588043 96.26263 0.314262 0.680785
3
8 2570.236 0.094045 2.61194 0.723513 95.20772 0.460674 0.90211
1
9 2669.225 0.107719 3.17757 0.891177 94.0587 0.627328 1.137502
1
10 2758.412 0.126491 3.75713 1.076288 92.848 0.810617 1.381464
6

The table shows that developed and developing markets do not affect the KSE stock exchange if
any fluctuation occurs in these stock markets. The change is due to own innovation of the KSE
stock exchange.

Period S.E. BSEL DHAKA FTSE_PRICE KSE_PRICE NYSE_PRICE SHENGAII

1 324.109 0.984985 1.457815 54.81502 1.028886 41.71329 0
2 447.1674 1.734452 0.785443 53.04063 5.142502 38.95524 0.341732
3 531.7399 1.860949 0.718419 51.80613 6.185143 39.02164 0.407716
4 592.4906 2.049948 0.854805 50.62756 6.387819 39.66669 0.413176
5 639.198 2.277855 1.089215 49.51397 6.243158 40.47927 0.396532
6 676.7721 2.543456 1.389396 48.41894 5.971869 41.30223 0.374112
7 708.0962 2.842676 1.73685 47.33504 5.660445 42.07341 0.35158
8 734.9837 3.173765 2.117888 46.26178 5.349277 42.76633 0.330961
9 758.6374 3.535688 2.521318 45.20216 5.057895 43.37014 0.312794
10 779.8842 3.927663 2.937752 44.15994 4.795475 43.88216 0.297003
Variance decomposition of NYSE

Table shows that develop and developing markets have an effect on the NYSE stock exchange if
any fluctuation occurs in these stock market. The change is not only due to own innovation of the
NYSE stock exchange.

Perio S.E. BSEL DHAKA FTSE_PRICE KSE_PRICE NYSE_PRIC SHENGAII

d E
1 68.35489 0.002874 0.14406 0.031225 0.079402 2.140406 97.60203
2
2 91.55974 0.115531 0.39777 0.143447 0.286623 1.93434 97.12229
3
3 107.4898 0.171823 0.53102 0.152812 0.277863 1.925715 96.94076
4
4 119.4426 0.235677 0.62004 0.141215 0.225571 1.99905 96.77844
9
5 128.8466 0.308745 0.69815 0.125644 0.218599 2.099433 96.54942
7
6 136.4883 0.391391 0.77696 0.112502 0.280996 2.209256 96.22889
5
7 142.8445 0.484045 0.86181 0.102719 0.413444 2.318227 95.81975
9
8 148.2292 0.587038 0.95548 0.09566 0.608075 2.421323 95.33242
1
9 152.8596 0.700723 1.05966 0.090451 0.854257 2.515779 94.77912
7
10 156.8922 0.825429 1.17550 0.086381 1.140923 2.600182 94.17158
2
Variance decomposition of Shanghai

The table shows that developed and developing markets do not affect the Shanghai Stock
Exchange if any fluctuation occurs in these stock markets. The change is due to own innovation
of the Shanghai Stock Exchange.
 Impulse response

ARCH Results:
Table 1.1

Heteroscedasticity Test: ARCH

F-statistic 6.330712 Prob. F (1330) 0.0123

Obs*R-squared 6.249196 Prob. Chi-Square (1) 0.0124

In Table 1.1 the results show that the value of prob. chi square is 0.0124
which explains that autocorrelation and heteroskedasticity exist in the
Bombay stock exchange.
Table 2.1 shows that the P value of BSEL (-1) in the mean equation of ARCH is
significant which explains that the previous day's return is helpful to predict
today’s return and the positive value of the coefficient shows that today's
return is 98.81% higher than the previous day return. In the variance
equation of ARCH, the value of the coefficient of residual is positive which
explains that the 13.71% today volatility is higher than the previous day, and
the P value of RESID (-1) ^2 0.000 significant which shows that today's
volatility can be explained based on past behavior of price. In Table 2.2 the P
value of GARCH is insignificant which reveals that the previous day's
volatility has no impact on today's volatility and the coefficient of GARCH is
negative which represents that 1.65% did not transfer in the next day.

Table 1.2

Heteroscedasticity Test: ARCH

F-statistic 4.11827 Prob. F (1330) 0.0432

Obs*R-squared 4.09216 Prob. Chi-Square (1) 0.0431

In table 1.2 of ARCH the value of Prob. The Chi-square is 0.0432 which
reveals that there is Autocorrelation and Heteroskedasticity in the DHAKA
stock exchange. Table 2.1 The mean equation of ARCH shows that the P
value of DSE (-1) is significant which means the previous day's return
predicts today's return and the positive value of coefficient DSE (-1) is
99.13% less than the previous day's return. In the variance equation of
ARCH, the value of the coefficient of residual is positive which explains that
the 11.13% today volatility is higher than the previous day and the P value of
RESID (-1) ^2 0.000 significant which shows that today volatility can be
explained based on past behavior of price. In Table 2.2 the P value of GARCH
is significant which reveals that the previous day's volatility has an impact on
today's volatility and the coefficient of GARCH is negative which represents
that 15% not transfer in the next day.

Table 1.3
Heteroscedasticity Test: ARCH

F- statistic 0.00674 Prob. F (1330) 0.9346

Obs *R-squared 0.006781 Prob. Chi-square 0.9344

(1)

In Table 1.3 the results show that the value of prob. chi square is 0.9344
which explains that autocorrelation and heteroskedasticity do not exist in the
Financial Times stock exchange.

Table 2.1 shows that the P value of FTSE (-1) in the mean equation of ARCH is
significant which explains that the previous day's return is helpful to predict
today’s return and the positive value of the coefficient show that today's
return is 95.55% higher than the previous day return. In the variance
equation of ARCH, the value of the coefficient of residual is positive which
explains that the 0.45% today volatility is higher than the previous day and
the P value of RESID (-1) ^2 0.000 insignificant which shows that today
volatility cannot be explained based on past behavior of price. In Table 2.2
the P value of GARCH is insignificant which reveals that the previous day's
volatility has no impact on today's volatility and the coefficient of GARCH is
negative which represents that 2.04% did not transfer in the next day.

Table 1.4

Heteroscedasticity Test ARCH

F- statistic 7.375548 Prob. F (1330) 0.007

Obs *R-squared 7.25803 Prob. Chi- 0.0071

square (1)
In Table 1.4 the results show that the value of prob. chi square is 0.0071
which explains that autocorrelation and heteroskedasticity exist in the
Karachi stock exchange.

Table 2.1 shows that the P value of KSE (-1) in the mean equation of ARCH is
significant which explains that the previous day's return helps predict today’s
return and the positive value of the coefficient shows that today's return is
97.77% higher than the previous day return. In the variance equation of
ARCH, the value of the coefficient of residual is positive which explains that
the 14.78% today volatility is higher than the previous day, and the P value
of RESID (-1) ^2 0.000 significant which shows that today's volatility can be
explained based on past behavior of price. In Table 2.2 the P value of GARCH
is insignificant which reveals that the previous day's volatility has no impact
on today's volatility and the coefficient of GARCH is negative which
represents that 11.96% did not transfer in the next day.

Table 1.5

Heteroscedasticity Test ARCH

F- statistic 46.86895 Prob. F (1330) 0

Obs *R-squared 41.28887 Prob. Chi-square (1) 0

In Table 1.5 the results show that the value of prob. chi square is 0.00 which
explains that autocorrelation and heteroskedasticity exist in the New York
Stock Exchange.

Table 2.1 shows that the P value of NYSE (-1) in the mean equation of ARCH
is significant which explains that the previous day's return helps predict
today’s return and the positive value of the coefficient shows that today's
return is 98.30% higher than the previous day return. In the variance
equation of ARCH, the value of the coefficient of residual is positive which
explains that the 35.25% today volatility is higher than the previous day and
the P value of RESID (-1) ^2 0.000 significant which shows that today
volatility can be explained based on past behavior of price. In Table 2.2 the P
value of GARCH is insignificant which reveals that the previous day's
volatility has no impact on today's volatility and the coefficient of GARCH is
negative which represents that 1.35% did not transfer in the next day.

Table 1.6

Heteroscedasticity Test ARCH

F- statistic 5.827438 Prob. F (1330) 0.0163

Obs *R-squared 5.761022 Prob. Chi-square (1) 0.0164

In Table 1.6 the results show that the value of prob. chi square is 0.0164
which explains that autocorrelation and heteroskedasticity exist in the
Shanghai Stock Exchange. Table 2.1 shows that the P value of SSE (-1) in the
mean equation of ARCH is significant which explains that the previous day's
return helps predict today’s return and the positive value of the coefficient
shows that today's return is 96.68% higher than the previous day return. In
the variance equation of ARCH, the value of the coefficient of residual is
positive which explains that the 13.17% today volatility is higher than the
previous day and the P value of RESID (-1) ^2 0.000 significant which shows
that today volatility can be explained based on past behavior of price. In
Table 2.2 the P value of GARCH is insignificant which reveals that the
previous day's volatility has no impact on today's volatility and the
coefficient of GARCH is negative which represents that 8.65% did not transfer
on the next day.

ARCH
Country Mean equation Variance equation

Variable Coefficient Prob. Variable Coefficient Prob.

India BSEL (- 0.98811 0 RESID^2(-1) 0.137192 0.0123

1)

Bangladesh DSE (-1) 0.991372 0 RESID^2(-1) 0.111376 0.0432

United FTSE (- 0.958864 0 RESID^2(-1) 0.004519 0.9346

Kingdom 1)

Pakistan KSE (-1) 0.97739 0 RESID^2(-1) 0.14786 0.007

United state NYSE (- 0.983035 0 RESID^2(-1) 0.352701 0

1)

China SSE (-1) 0.966899 0 RESID^2(-1) 0.131729 0.0163

GARCH RESULTS:

Country Variable Coefficient Prob.

 India GARCH (-1) -0.0165 -0.0165

Bangladesh GARCH (-1) -0.15304 0.001

United Kingdom GARCH (-1) -0.02049 0.7776

Pakistan GARCH (-1) -0.11964 0.1352

United state GARCH (-1) 0.228242 0.0135

China GARCH (-1) 0.086597 0.4999

Conclusion
This research aims to investigate the long-term relationship between developed markets and
developing markets. The developed countries include the United Kingdom, China, USA, and the
developing countries include Pakistan, India, and Bangladesh. The data was gathered from
January 1st, 2017 to 30th June 2023 from investing.com. The results of the correlation show that
the selected developing markets (Pakistan, China, India) have a weak correlation with developed
stock markets. This research would assist investors and portfolio managers to diversify their risk
and enhance their return at a given level of profit. Augmented Dickey-Fuller (ADF) and Phillips
Perron tests are used to check the stationarity of stock prices. The data is found to be stationary at
first difference. Multivariate cointegration is applied which indicates that there are three
equations of integration among stock markets. Bivariate cointegration results indicate a long-
term relationship between developed and developing markets. The results of vector
decomposition investigate that change in developing markets is due to its innovation if the
change occurs in the stock market it is not due to other developing & developed markets except
for the NYSE. ARCH & GARCH technique is used to check the volatility in developed and
developing stock markets. The result shows that the NYSE stock exchange is more volatile
because 22.82% is volatility transfer to the next day and India is less volatile because of 1.6%
volatility transfer to the next day.