Interrelationship dynamics between stock markets of nation under debt crisis and its major trading partners: evidence from Sri Lankan crisis

Shubham Kakran (), Nishant Sapra (), Ashish Kumar () and Arpit Sidhu ()
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Shubham Kakran: Lovely Professional University
Nishant Sapra: Management Development Institute Gurgaon
Ashish Kumar: SRM University
Arpit Sidhu: Government College Sihunta

Future Business Journal, 2024, vol. 10, issue 1, 1-15

Abstract: Abstract A series of crises triggered over a decade may bring global recession, which may impact millions of investors, including countries teetering on the brink due to forex reserve shortages; this study addresses the significant financial event of a small nation declaring bankruptcy. Such events can have adverse consequences on the global economy, particularly affecting the stock market indices of the country’s trading partners. Our research investigates the impact of small nation bankruptcies on the stock market indices of connected importing and exporting partners. Focusing on the recent political and economic crisis in Sri Lanka, we analyze interactions between the Sri Lankan stock exchange and its key trading partners. Employing pairwise cointegration and the vector auto-regressive model-based Granger causal approach, our findings reveal cointegration among the stock markets in Germany, Italy, and Sri Lanka. Notably, the pre-crisis causal links between the Colombo Stock Exchange and other stock markets have dissolved. These insights hold valuable implications for understanding and preparing for similar circumstances in other South Asian economies grappling with forex shortages and rising inflation. Graphical abstract

Keywords: Co-integration approach; Emerging markets; Economic contagion; Sri Lanka crises; Vector auto-regressive (search for similar items in EconPapers)
JEL-codes: G1 G11 G14 G15 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1186/s43093-024-00301-z

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