Market Efficiency, Inter-linkages and Volatility Transmission in Stock Markets of Selected SAARC Countries

This study is a comprehensive attempt at examining the weak form of market efficiency, contemporaneous relationships, short run inter-linkages, long run co-integration and the strength of volatility transmission in the stock markets of selected SAARC countries. Only the stock markets of Bangladesh, India, Pakistan and Sri Lanka were taken as a proxy to represent the SAARC nations, because of non-availability of sufficient data for other SAARC countries. The dataset consists of daily stock indices for an approximate sixteen year period starting from January 2, 2001 till June 30, 2016. The data has been analyzed using Descriptive Statistics, Cross-correlations, ADF, PP and KPSS Unit ischolar_main test, Lo and MacKinlay Variance Ratio test, Granger causality test, Impulse response analysis, Johansen’s Co-integration test and the ARCH-GARCH model. The results indicate that only Bangladesh and Indian stock markets follow random walk as per Lo and MacKinlay Variance Ratio test. Findings revealed presence of significant short run inter-linkages, with the causality moving from Indian stock market towards Pakistan stock market and long run co-integration among almost all the four stock markets of SAARC countries. The result of ARCH-GARCH model reveals that the volatility in stock markets of countries does get affected by the volatile behavior of stock markets of other countries. The present study is unique with a focus on SAARC countries, which is an under-researched area. Further, it is comprehensive by considering all the important aspects of investing in the stock market, and hence, its findings can be very useful to the potential investors, governments and policy makers.