FACTORS INFLUENCING CO-MOVEMENT OF DIVERSIFIED PORTFOLIO BETWEEN PAKISTAN AND INDIA
DOI:
https://doi.org/10.31436/ijema.v24i2.352Abstract
An internationally diversified portfolio is effective if the co-movement pattern among underlying securities is analyzed not only on the basis of past returns but also on market and economic factors that can explain such co-movements. The current study determines the role of bilateral foreign portfolio equity holding, gross domestic product (GDP) and interest rate differential on international co-movement patterns among emerging and frontier Asian (EFA) markets. We started our analysis by estimating rolling beta estimation used in formulating bilateral co-movement index. After that, ARDL technique is applied to check long term relationship among the included variables. For short term relationship, error correction term is added for measuring speed of convergence toward long run equilibrium. Finally, we applied variance decomposition analysis under the VAR framework to check individual variances of each independent variable on bilateral equity return co-movement. We report significant long run relationship between bilateral equity co-movement and GDP growth differential of Pakistan and India. The presence of short run relationship among all variables with high speed of convergence suggests that the process reverts itself toward the long run. Our findings regarding significance of Gross Domestic Product (GDP) growth differential between India and Pakistan support the portfolio balance theory proposed by Kodres and Pritsker (2002).
References
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Ripley, Duncan M. “Systematic Elements in the Linkage of National Stock Market Indices.†The Review of Economics and Statistics (1973): 356-61.
Rockinger, Michael, and Giovanni Urga. “A Time Varying Parameter Model to Test for Predictability and Integration in the Stock Markets of Transition Economies.†Journal of Business & Economic Statistics 19, no. 1 (2001): 73-84.
Speidell, Lawrence S., and Axel Krohne. “The Case for Frontier Equity Markets.†The Journal of Investing 16, no. 3 (2007): 12-22.
Syriopoulos, Theodore. “Dynamic Linkages between Emerging European and Developed Stock Markets: Has the EMU Any Impact?†International Review of Financial Analysis 16, no. 1 (2007): 41-60.
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Wälti, Sébastien. “Stock Market Synchronization and Monetary Integration.†Journal of International Money and Finance 30, no. 1 (2011): 96-110.
Zheng, C., L. Chen, and D. Yiwei. “Proxy to Shocks or Proxy to Diversify, Correlation Risk and Its Implications.†Proceedings of the 2nd 3-C (China, Canada, US) Risk Forum and the 5th International Conference on Engineering and Risk Management. Beijing, China, 24–26 September 2012.
Arouri, Mohamed El Hedi, Amine Lahiani, and Duc Khuong Nguyen. “Return and Volatility Transmission between World Oil Prices and Stock Markets of the GCC Countries.†Economic Modelling 28, no. 4 (2011): 1815-25.
_______, Jamel Jouini, and Duc Khuong Nguyen. “Volatility Spillovers between Oil Prices and Stock Sector Returns: Implications for Portfolio Management.†Journal of International Money and Finance 30, no. 7 (2011): 1387-405.
Baur, Dirk. “Multivariate Market Association and Its Extremes.†Journal of International Financial Markets, Institutions and Money 16, no. 4 (2006): 355-69.
Beine, Michel, and Bertrand Candelon. “Liberalization and Stock Market Co-Movements between Emerging Markets.†CESifo Working Paper No. 2131, 2007.
Bekaert, Geert, and Campbell R. Harvey. “Timeâ€Varying World Market Integration.†The Journal of Finance 50, no. 2 (1995): 403-44.
_______, Michael Ehrmann, Marcel Fratzscher, and Arnaud J. Mehl. “Global Crises and Equity Market Contagion.†National Bureau of Economic Research No. w17121, 2011.
_______, Robert J. Hodrick, and Xiaoyan Zhang. “International Stock Return Comovements.†The Journal of Finance 64, no. 6 (2009): 2591-2626.
_______, and Xiaozheng Wang. “Inflation Risk and the Inflation Risk Premium.†Economic Policy 25, no. 64 (2010): 755-806.
Canova, Fabio, and Gianni de Nicolò. “Stock Returns, Term Structure, Inflation, and Real Activity: An International Perspective.†Macroeconomic Dynamics 4, no. 3 (2000): 343–72.
Caporale, Guglielmo Maria, Andrea Cipollini, and Nicola Spagnolo. “Testing for Contagion: A Conditional Correlation Analysis.†Journal of Empirical Finance 12, no. 3 (2005): 476-89.
Capiello, Lorenzo, Simone Manganelli, and Bruno Gerard. “Measuring Comovements by Regression Quantiles.†ECB Working Paper No. 501, July 2005.
Christoffersen, Peter, Vihang Errunza, Kris Jacobs, and Hugues Langlois. “Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach.†Review of Financial Studies 25, no. 12 (2012): 3711-51.
Coeurdacier, Nicolas, and Stéphane Guibaud. “International Portfolio Diversification is Better Than You Think.†Journal of International Money and Finance 30, no. 2 (2011): 289-308.
Dumas, Bernard, Campbell R. Harvey, and Pierre Ruiz. “Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs?†Journal of International Money and Finance 22, no. 6 (2003): 777-811.
Ebrahim, Muhammed Shahid. “The Financial Crisis: Comments from Islamic Perspectives.†International Journal of Economics, Management and Accounting 16, no. 2 (2008): 111-38.
Engle, Robert F., and Clive W.J. Granger. “Co-Integration and Error Correction: Representation, Estimation, and Testing.†Econometrica 55, no. 2 (1987): 251-76.
Forbes, Kristin J., and Menzie D. Chinn. “A Decomposition of Global Linkages in Financial Markets Over Time.†Review of Economics and Statistics 86, no. 3 (2004): 705-22.
Fratzscher, Marcel. “Financial Market Integration in Europe: On the Effects of EMU on Stock Markets.†International Journal of Finance & Economics 7, no. 3 (2002): 165-93.
Gilmore, Claire G., Brian M. Lucey, and Ginette M. McManus. “The Dynamics of Central European Equity Market Comovements.†The Quarterly Review of Economics and Finance 48, no. 3 (2008): 605-22.
Gklezakou, Triantafyllia, and John Mylonakis. “Interdependence of the Developing Stock Markets, Before and During the Economic Crisis: The Case of South Europe.†Journal of Money, Investment and Banking 11 (2009): 70-8.
Grubel, Herbert G. “Internationally Diversified Portfolios: Welfare Gains and Capital Flows.†The American Economic Review 58, no. 5 (1968): 1299-314.
Guidolin, Massimo, and Stuart Hyde. “Equity Portfolio Diversification Under Time-Varying Predictability: Evidence from Ireland, the US, and the UK.†Journal of Multinational Financial Management 18, no. 4 (2008): 293-312.
Hamao, Yasushi, Ronald W. Masulis, and Victor Ng. “Correlations in Price Changes and Volatility Across International Stock Markets.†Review of Financial Studies 3, no. 2 (1990): 281-307.
Hartmann, Peter, and Thomas W. Teasdale. “A Test of Spearman’s “Law of Diminishing Returns†in Two Large Samples of Danish Military Draftees.†Intelligence 32, no. 5 (2004): 499-508.
Hassler, Uwe, and Jürgen Wolters. “Autoregressive Distributed Lag Models and Cointegration.†Allgemeines Statistisches Archiv 90, no. 1 (2006): 59-74.
Johnson, Robert, and Luc Soenen. “Indicators of Successful Companies.†European Management Journal 21, no. 3 (2003): 364-9.
Kizys, Renatas, and Christian Pierdzioch. “Changes in the International Comovement of Stock Returns and Asymmetric Macroeconomic Shocks.†Journal of International Financial Markets, Institutions and Money 19, no. 2 (2009): 289-305.
Kodres, Laura E., and Matthew Pritsker. “A Rational Expectations Model of Financial Contagion.†The Journal of Finance 57, no. 2 (2002): 769-99.
Li, Xiao-Ming, and Lawrence C. Rose. “Market Integration and Extreme Co-Movements in APEC Emerging Equity Markets.†Applied Financial Economics 18, no. 2 (2008): 99-113.
Lin, Wen-Ling, Robert F. Engle, and Takatoshi Ito. “Do Bulls and Bears Move Across Borders? International Transmission of Stock Returns and Volatility.†Review of Financial Studies 7, no. 3 (1994): 507-38.
Longin, Francois, and Bruno Solnik. “Is the Correlation in International Equity Returns Constant: 1960–1990?†Journal of International Money and Finance 14, no. 1 (1995): 3-26.
Mabrouk, Ahmed Hassan. “Stock Price Forecasting in an Interest Free Economy.†International Journal of Economics, Management and Accounting 19, no. 3 (2011): 101-14.
Markowitz, Harry. “Portfolio Selection.†The Journal of Finance 7, no. 1 (1952): 77-91.
Nier, Erlend, Jing Yang, Tanju Yorulmazer, and Amadeo Alentorn. “Network Models and Financial Stability.†Journal of Economic Dynamics and Control 31, no. 6 (2007): 2033-60.
Pesaran, M. Hashem, Yongcheol Shin, and Richard J. Smith. “Bounds Testing Approaches to the Analysis of Level Relationships.†Journal of Applied Econometrics 16, no. 3 (2001): 289-326.
_______, Yongcheol Shin, and Ron P. Smith. “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels.†Journal of the American Statistical Association 94, no. 446 (1999): 621-34.
Pretorius, Elna. “Economic Determinants of Emerging Stock Market Interdependence.†Emerging Markets Review 3, no. 1 (2002): 84-105.
Pukthuanthong, Kuntara, and Richard Roll. “Global Market Integration: An Alternative Measure and Its Application.†Journal of Financial Economics 94, no. 2 (2009): 214-32.
Ripley, Duncan M. “Systematic Elements in the Linkage of National Stock Market Indices.†The Review of Economics and Statistics (1973): 356-61.
Rockinger, Michael, and Giovanni Urga. “A Time Varying Parameter Model to Test for Predictability and Integration in the Stock Markets of Transition Economies.†Journal of Business & Economic Statistics 19, no. 1 (2001): 73-84.
Speidell, Lawrence S., and Axel Krohne. “The Case for Frontier Equity Markets.†The Journal of Investing 16, no. 3 (2007): 12-22.
Syriopoulos, Theodore. “Dynamic Linkages between Emerging European and Developed Stock Markets: Has the EMU Any Impact?†International Review of Financial Analysis 16, no. 1 (2007): 41-60.
Taylor, Mark P., and Ian Tonks. “The Internationalisation of Stock Markets and the Abolition of UK Exchange Control.†The Review of Economics and Statistics 71, no. 2 (1989): 332-6.
Wälti, Sébastien. “Stock Market Synchronization and Monetary Integration.†Journal of International Money and Finance 30, no. 1 (2011): 96-110.
Zheng, C., L. Chen, and D. Yiwei. “Proxy to Shocks or Proxy to Diversify, Correlation Risk and Its Implications.†Proceedings of the 2nd 3-C (China, Canada, US) Risk Forum and the 5th International Conference on Engineering and Risk Management. Beijing, China, 24–26 September 2012.
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Published
2016-11-29
How to Cite
Rehman, M. U., & Amir Shah, S. M. (2016). FACTORS INFLUENCING CO-MOVEMENT OF DIVERSIFIED PORTFOLIO BETWEEN PAKISTAN AND INDIA. International Journal of Economics, Management and Accounting, 24(2), 189–207. https://doi.org/10.31436/ijema.v24i2.352
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