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Changes in co-movement and risk transmission between South Asian stock markets amidst the development of regional co-operation

Muhammad Niaz Khan, Suzanne G. M. Fifield (), Nongnuch Tantisantiwong and David M. Power
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Muhammad Niaz Khan: University of Science and Technology Bannu
Suzanne G. M. Fifield: University of Dundee
Nongnuch Tantisantiwong: Krungthai Bank
David M. Power: University of Dundee

Financial Markets and Portfolio Management, 2022, vol. 36, issue 1, No 4, 87-117

Abstract: Abstract This paper documents evidence of changes in the co-movement of stock returns and risk transmission among four South Asian stock markets over periods of regional market reform and global market instability. The sample period (1993–2015) is disaggregated into three sub-periods: before and after the establishment of the South Asian Federation of Exchanges (SAFE) and after the 2008 Global Financial Crisis. The principal components investigation and cointegration analysis conclude that the co-movement among stock returns in this region altered amidst a change in the institutional context and global economic uncertainty. Using a tetra-variate GARCH-BEKK model, we find that, after the establishment of SAFE, the interactions among the markets increased through volatility spillovers, but decreased through shock spillovers. In addition, there were more shock and volatility spillovers in the last sub-period as compared to the first two sub-periods, indicating that risk transmission across countries increased during the period of uncertainty. In particular, the Indian stock market was a risk spreader in South Asia after the setup of SAFE and its influence on the regional stock markets increased even further after the 2008 Global Financial Crisis.

Keywords: Co-movement; Financial liberalisation; Risk transmission (search for similar items in EconPapers)
JEL-codes: C58 G14 G15 G17 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11408-021-00386-4

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