Linkage of Pakistan Stock Market with Selected Developed and Developing Countries

Abstract

Purpose - The purpose of this paper is to investigate the stock
market linkage of Pakistan with the stock markets of developed and
developing countries and to know how investors and fund
managers can gain the benefit of diversification with developed
and developing countries by investing their funds internationally
for a long period of time.
Design/Methodology/Approach – Unit root test, Johansen
multivariate co-integration analysis and Granger causality
methods have been applied on the stock market indexes of
Pakistan, US, UK, Canada, Japan, Germany, Australia, China,
India, Indonesia, Malaysia and Turkey for period 2006-2016.
And Chow test has been chosen to check the structural break in the
data.
Findings – By using bivariate co-integration analysis it was found
that Pakistani stock market has long term relationship with UK,
Canada and Germany while no long term relationship has been
found with developing countries, showing that benefits of
diversification exist in developing countries for the whole period
under study. Chow test confirmed that structural break in the data
existed. Before crisis Pakistani stock market was just co-integrated
with Japan and Germany while during crisis it’s co-integration
strengthened with US, UK, Canada, Turkey and Germany. And
Granger causality test showed that Germany, UK and US influence
Pakistani stock market. Another important inference of our
findings is that the degree of integration among stock markets of under financial crises.
Originality/Value – This study has practical significance for
investors and fund managers for understanding the stock market
co-integration and benefits of funds diversification.