Relationship between developed, European and South Asian stock markets: a multivariate analysis

Abstract

Purpose

The assessment of interdependence between stock markets is an important aspect of international portfolio management. The purpose of this paper is to examine and highlight the diversification potential of South Asian stock markets vis-à-vis developed and European stock markets.

Design/methodology/approach

The developed stocks markets include USA and UK, and South Asian stock markets include India, Pakistan and Sri Lanka while DJ STOXX 600 index is used to represent the European stock markets. Monthly data are used to examine long-run relationship through ARDL bound testing approach and estimates are obtained using DLOS. Short-term dynamics are captured through vector error correction-based Granger causality.

Findings

South Asian stock markets are closely linked with each other; similarly, developed/European markets are interlinked. US stock market not only impacts European stock markets, it also Granger cause South Asian stock markets. The findings suggest increase in comovement of South Asian stock markets with the global markets after financial crises of 2007-2008.

Practical implications

The diversification benefits of South Asian stock markets for international investors are still evident due to their low relationship (in both long and short run) with developed/European stock markets.

Originality/value

Given the emergence of South Asian stock markets, new insight on their relationship with developed stock markets can provide interesting findings for international portfolio diversification. The South Asian equity markets are an important source of investment because of their immense growth and weak correlation with international markets.

Citation

Shahzad, S.J.H., Kanwal, M., Ahmed, T. and Ur Rehman, M. (2016), "Relationship between developed, European and South Asian stock markets: a multivariate analysis", South Asian Journal of Global Business Research, Vol. 5 No. 3, pp. 385-402. https://doi.org/10.1108/SAJGBR-01-2015-0002