STOCK MARKET INDICES LONG RUN RELATIONSHIPS BETWEEN SOUTH ASIAN AND DEVELOPED ECONOMIES

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 (Pakistan), BSE (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. Our results reveal the long-term relationship between the stock markets of developed and developing countries. 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.