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Article
Publication date: 29 July 2014

Monica Singhania and Shachi Prakash

The purpose of this paper is to examine cross-correlation in stock returns of SAARC countries, conditional and unconditional volatility of stock markets and to test…

Abstract

Purpose

The purpose of this paper is to examine cross-correlation in stock returns of SAARC countries, conditional and unconditional volatility of stock markets and to test efficient market hypothesis (EMH).

Design/methodology/approach

Stock indices of India, Bangladesh, Sri Lanka and Pakistan are considered to serve as proxy for stock markets in SAARC countries. Data consist of daily closing price of stock indices from 2000 to 2011. Since preliminary testing indicated presence of serial autocorrelation and volatility clustering, family of GARCH models is selected.

Findings

Results indicate presence of serial autocorrelation in stock market returns, implying dependence of current stock prices on stock prices of previous times and leads to rejection of EMH. Significant relationship between stock market returns and unconditional volatility indicates investors’ expectation of extra risk premium for exposing their portfolios to unexpected variations in stock markets. Cross-correlation revealed level of integration of South Asian economies with global market to be high.

Research limitations/implications

Business cycles and other macroeconomic developments affect most companies and lead to unexplained relationships. The paper finds stock markets to exist at different levels of development as economic liberalization started at different points of time in SAARC countries.

Practical implications

Correlation between stock indices of SAARC economies are found to be low which is in line with intra-regional trade being one of lowest as compared to other regional groups. Results point towards greater need for economic cooperation and integration between SAARC countries. Greater financial integration leads to development of markets and institutions, effective price discovery, higher savings and greater economic progress.

Originality/value

The paper focuses on EMH and risk return relation for SAARC nations.

Details

South Asian Journal of Global Business Research, vol. 3 no. 2
Type: Research Article
ISSN: 2045-4457

Keywords

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