Time varying integration amongst the South Asian equity markets: An empirical study

Abstract

In this paper, we examine the dynamic nature of equity market integration for the South Asian countries. The daily data for local equity indices are used from 6 January 2004 to 31 March 2015. Copula GARCH models and Diebold and Yilmaz methodology have been employed to study the inter-temporal process of equity market integration. Empirical results show that the sample countries of the region exhibit very little or no levels of integration between them. Equity portfolio flows within the South Asian region reconfirms this trend for low integration in the region. Further, trend analysis of the fundamental determinants of financial integration for the SAARC countries was performed and the same was compared with its neighbouring regional economic bloc in Asia i.e. ASEAN + 6. It indicated that SAARC countries have to show sincere political commitment and require collaboration in efforts of policy realignment to work on their governance parameters, improve on their trade linkages and trade tariffs and develop their equity market infrastructure to achieve higher levels of financial integration. The paper contributes to the International Finance literature, especially dealing with regional economic blocs and has important implications for policy-makers, portfolio managers and academia.

Keywords:

• stock market integration
• SAARC
• South Asia
• time varying copula
• fundamental determinants
• equity market development

JEL Classifications:

• C13
• C52
• F21
• F36
• G15

Public Interest Statement

Regional integration reinforces ties amongst a set of diverse economies so as to provide avenues for economic opportunities, sustainable growth, financial stability and inclusive development. South Asia, a diverse region of heterogeneous countries, formally initiated regional integration process with the formation of South Asian Association of Regional Cooperation (SAARC) in 1985. Until late 1970s, these countries followed high protectionist trade policies and maintained strict capital controls. But with the changing global economic landscape, SAARC countries have embraced upon outward oriented strategies and have increasingly acknowledged that regional approaches are quintessential to accomplish their developmental challenges. Ever since the formation of SAARC, South Asia has remained one of the least integrated regions in the world. In this context, we examine the dynamic nature of equity market integration for the South Asian countries. Empirical results show that the sample countries of the region exhibit very little levels of integration between them.

Acknowledgments

The authors sincerely thank the anonymous reviewer and the journal editor for their valuable inputs and suggestions which have helped in refining the manuscript.

This manuscript is part of a sponsored research project entitled “Financial Integration in the SAARC Region: Empirical Analysis and Policy Issues”. The authors would like to acknowledge the financial support provided by Indian Council of Social Sciences Research (ICSSR). We would also like to thank Ms. Sakshi Saini, Research Assistant working under this project, for her research support in preparing this manuscript.

Notes

1. ASEAN was created with the signing of Bangkok Declaration in 1967, by Indonesia, Malaysia, Philippines, Singapore and Thailand. Subsequently the ASEAN bloc grew with the addition of Brunei, Vietnam, Laos, Myanmar and Cambodia (in the order of their entry). The 10 ASEAN members plus the three members i.e. Japan, China and South Korea constitutes the ASEAN + 3 bloc. The second East Asian Summit (EAS) was held Cebu in January 2007, wherein 10 ASEAN members and six countries including China, Japan, South Korea, India, Australia and New Zealand participated. Japan regards this ASEAN + 6 (EAS group) as an appropriate group for East Asia’s trade and investment cooperation.

2. In this paper, South Asia refers to the eight member countries of the South Asia Association for Regional Cooperation (SAARC)—Bangladesh, Bhutan, India, Nepal, Pakistan, Sri Lanka and the Maldives. Afghanistan later became the eighth member in 2007.

3. SAARCFINANCE is a regional network of SAARC Central Bank Governors and Finance Secretaries formed in 1998, to foster cooperation in macroeconomic policies; synchronize banking legislations and practices; collaborate amongst central banks and finance ministries; share ideas, information and experiences; undertake monetary and exchange cooperation; investigate global financial developments; and promote research on economic and financial issues amongst member countries. South Asian Federation of Exchanges (SAFE) was established in 2000, for development of securities markets, encouraging cross-border listings and achieving greater harmonization while South Asian Securities Regulators’ Forum (SASRF) was formed in 2005, to further enhance the cooperation and exchange of information amongst the regulators of these countries.

4. For a survey of the literatures and various indicators, see (Baele, Ferrando, Hordahl, Krylova, & Monnet, 2004; Cavoli et al., 2004; Poonpatpibul, Tanboon, & Leelapornchai, 2006).

5. For survey of literature using these indicators, see (Gupta, Sehgal, & Deisting, 2015; Yu, Fung, & Tam, 2010).

6. The equations for Total Connectedness, Directional Spillover and Net Spillover are the same as used by Filho & Hong (2016).

7. Annualization has been done assuming 250 trading days in an year.

8. Unit root test results are not reported due to brevity of space. These are available on request from the authors.

9. The two charts are not reported due to brevity of space. These are available on request from the authors.

Additional information

Notes on contributors

Sanjay Sehgal

Sanjay Sehgal is currently a professor of Finance and Head, Department of Financial Studies, University of Delhi. He got his PhD from Delhi School of Economics, University of Delhi and has done his post doctorate from Department of Finance, London School of Economics, UK. He has a teaching experience of about 27 years in the field of investment management, financial derivatives, corporate finance and financial econometrics.

Piyush Pandey

Piyush Pandey is working as assistant professor in Finance and Accounting area at FORE School of Management, New Delhi. He was a PhD student at the Department of Financial Studies, University of Delhi under the supervision of Sanjay Sehgal and has submitted his doctoral thesis titled “Financial Market Integration in the East Asia Economic Community Region- An Empirical Study”.

Florent Deisting

Florent Diesting is currently a professor of Economics at ESC Pau, France. His research areas include Financial Economics, Risk Management, Insurance and Econometrics.