Integration between stock markets of Pakistan and Emerging Countries

Abstract

The research is focused on finding the integration between stock market of Pakistan and other Emerging countries i.e. to know whether there are co movements in the stock exchanges due to influencing changes in other countries. Emerging countries selected for analyzes includes China, India, Indonesia and Malaysia, these emerging economies are selected due to the fact that they have the potential to grow massive in the coming years and also Pakistan has major trading ties with these countries. Bilateral trading ties are also considered in having a look at the integration level, as the trading is an important aspect in defining the country’s economic relationship. Bivariate and Multivariate Johansen Co integration analysis is applied in order to know the inter market relationship and also relation as a whole. The co integration analysis helps the investor in making the decisions as the investors are more aware of the risk level and the diversification opportunity available in different markets. Granger causality and VAR tests are applied in order to know lead lag factor and short term relation respectively. The results of the analysis implies that there is not any integration found in the Pakistan and emerging stock markets. The investors from Pakistan and other countries could take benefit from the diversification opportunity available for them. So as a result Pakistani investor could invest in these emerging markets to maximize its return and diversify the risk which would ultimately benefit investor’s portfolio.