Causality among Stock Returns of Major South Asian Markets

Abstract

The objective of this research is to investigate the existence of a causal connection between the daily stock returns of the key South Asian stock markets. To benefit from such integration, if there is any, investors and policymakers must craft and execute strategies that take this relationship into account. Researchers can also benefit from the findings since they will be able to craft research strategies based on this study while answering their respective research agendas. This paper considers daily returns of BSE Sensex 30, DSEX, and Karachi All Share indices as representatives of returns from stock markets of India, Bangladesh, and Pakistan respectively since these are the broad indices of their respective markets. Sri Lanka has been disqualified from the tests due to its recent economic fragility. Using 7,113 data points from the aforementioned markets between January 31, 2013, and August 31, 2022, Granger causality and augmented Dickey-Fuller test (ADF) has been applied to evaluate if these are stationary and exhibit any causal links. Results show that returns of all markets are stationary, disqualifying them from undergoing a co-integration test. Additionally, the Indian and Pakistani stock markets exhibit bidirectional causality, indicating that these markets' returns influence one another.