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The Paradigm Shift in the Pakistan Stock Exchange’s Financial Integration Post-FTA and CPEC

Abdul Wahid () and Muhammad Zubair Mumtaz ()
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Abdul Wahid: Lecturer, Department of Governance and Public Policy, Faculty of Management Sciences, National University of Modern Languages, Islamabad, Pakistan.
Muhammad Zubair Mumtaz: Assistant Professor, School of Social Sciences and Humanities, National University of Science and Technology, Islamabad, Pakistan.

Lahore Journal of Economics, 2018, vol. 23, issue 1, 21-50

Abstract: This paper examines whether regional connectivity causes return and volatility spillovers and the co-movement of stock exchanges to shift from international to regional markets. Using the China-Pakistan free trade agreement (FTA) of 2006 and the China-Pakistan Economic Corridor (CPEC) agreement to represent events of regional connectivity, we test this proposition based on data for two regional stock exchanges (the Pakistan Stock Exchange and Shenzhen Stock Exchange) and two global markets (the FTSE 100 and Nasdaq). We divide the convergence and co-integration of the stock markets into three phases: overall sample (2001–17), pre-FTA and post-FTA, and pre-CPEC and post-CPEC. Applying a GARCH (1, 1) model, co-integration, Granger causality and seasonality, we find that regional connectivity causes return and volatility spillovers and co-movements in the Pakistan Stock Exchange to shift from international markets to regional markets.

Keywords: Financial integration; China-Pakistan economic corridor; interdependency; co-integration; free trade agreement; regional connectivity; Pakistan. (search for similar items in EconPapers)
JEL-codes: C22 E44 F15 F21 R58 (search for similar items in EconPapers)
Date: 2018
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