Financial market linkages in South Asia: Evidence using a multivariate GARCH model

Ahmed M. Khalid*, Gulasekaran Rajaguru

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)

Abstract

Regional integration of the financial markets is the building-block for globalisation and internalisation. Many regions around the world have recently been engaged in such regional economic and financial market integration to form the basis of a more complex international financial system. The recent developments in South Asia and the revived activities under the SAARC forum have raised some hopes for a more sustained economic development in the regional economies. It is timely, therefore, to investigate the prospects of regional financial market integration in the South Asian region. In this perspective, this paper analyses the currency market integration within four South Asian countries and with their major trading partners. For empirical estimation, we use data from a sample of four South Asian countries, namely, India, Pakistan, Bangladesh, and Sri Lanka. The paper examines the nature of the causal relationship between exchange rates in the sample countries and their major trading partners. Both the short-run and the long-run causal relationships between these markets are examined using high-frequency data of exchange rates. The paper also explores whether the causal linkages between these variables are of similar intensity across the country and across the market. The nature of the mean and volatility transmission between stock and foreign exchange markets is explored through multivariate exponential GARCH model, which is capable of capturing asymmetries in the volatility transmission mechanism in both the short run and the long run within a co-integration framework. The departing feature of this approach is that it captures both linear and non-linear relationships, which are linked through second order moments. We believe that this to be fresh research on this issue for South Asia and it may have important implications for any future, policy for the region.

Original languageEnglish
Pages (from-to)585-603
Number of pages19
JournalPakistan Development Review
Volume43
Issue number4 II
Publication statusPublished - Dec 2004

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