International stock markets Integration and dynamics of volatility spillover between the USA and South Asian markets: evidence from Global financial crisis
| DOI | https://doi.org/10.1108/JABS-03-2019-0071 |
| Pages | 779-794 |
| Published date | 13 May 2020 |
| Date | 13 May 2020 |
| Author | Umm E. Habiba,Shen Peilong,Wenlong Zhang,Kashif Hamid |
| Subject Matter | International business,Strategy |
International stock markets Integration and
dynamics of volatility spillover between the
USA and South Asian markets: evidence
from Global financial crisis
Umm E. Habiba, Shen Peilong, Wenlong Zhang and Kashif Hamid
Abstract
Purpose –The purpose of this paper is to investigatethe cointegration and volatility spillover dynamics
between the USA and South Asian stock markets, namely, India, Pakistan and Sri Lanka. The main
objective of this study is to provide the knowledge about integration of financial market and volatility
spilloversbefore, during and after globalfinancial crisis to investors, fundmanagers and policy-makers.
Design/methodology/approach –The Johansenand Juselius cointegration test, Granger Causalitytest
and bivaraite EGARCH model have been applied in this study to examine integration and volatility
spilloversbetween selected stock markets.
Findings –The findings show that long-term integration between the USA market and South Asian
emerging stock markets. It is found that USA stock markethas causal relationship with emerging stock
markets in short-term. The findings of EGARCH modelreveal that asymmetric volatility spillover effects
significant in all selected stock markets in pre, during and post-crisis periods. Furthermore, significant
volatilityspillover is found from stock markets of USA to allselected South Asian markets during and post-
crisis periods.However, volatility spillovers from USA to India and Sri-Lanka marketsare significant, while
insignificant in case of Pakistani market in pre-crisis period. Overall, we find that returns and volatility
spillovereffects are higher in financial crisis periodas compared to non-financial crisisperiod.
Practical implications –The findings of this paper have important implications for investors, portfolio
managers and policy-makers. They can take potentialbenefits from international portfolio diversification
by considering all these facts. The understanding and knowledge of across volatility transmission help
them to maximize the gains from diversification and minimize the risk. Policy-makers can developsuch
strategieswhich protect the markets of these economies fromfuture financial crisis.
Originality/value –Although in financeliterature numerous studies have been conducted onintegration
between different stockmarkets, most of the studies investigated the integrationand volatility spillovers
between developed stock markets. However, many studies also analyzed the integration among
emergingstock markets in literature review but it is hard to find studiesin the context of South Asian stock
markets on the effect of global financialcrisis on stock markets. The main contribution of this study is to
investigate the stock marketsintegration and volatility transmission betweenthe USA and South Asia by
consideringthe effect of recent 2007 US subprimefinancial crisis.
Keywords Stock markets, Financial crisis, Integration, EGARCH, Volatility spillover,
USA and South Asian
Paper type Research paper
Introduction
The increasing interdependence of stock markets among different economies has been
witnessed over the last years because of globalization and liberalization of financial
markets. The integration of equity markets has created a lot of interest among investors,
Umm E. Habiba,
Shen Peilong and
Wenlong Zhang all are
based at the School of
Finance, Shanxi University
of Finance and Economics,
Taiyuan, China.
Kashif Hamid is based at
the Institute of Business
Management Sciences,
University of Agriculture
Faisalabad, Faisalabad,
Pakistan.
Received 3 March 2019
Revised 4 July 2019
14 November 2019
31 January 2020
Accepted 9 April 2020
DOI 10.1108/JABS-03-2019-0071 VOL. 14 NO. 5 2020, pp. 779-794, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 779
academic researchers and policy-makers to constantly monitor the degree of associations
among different stock markets. Integration of stock markets can be defined as a condition
where different stock markets move together and predict the similar trend (Chen, 2002).
Due to liberalization of stock markets, the investors can invest across national markets. The
elimination of restrictions for investments to across border stock markets not only increased
the opportunities for investors but also became the reason of integration between
international stock markets. The investors can obtain potential opportunities from
international diversification in that case, if different stock markets are not perfectly
integrated. In case if different markets are integrated then there are fewer opportunities of
potential gains from portfolio diversification. Moreover, the flow of financial shocks is high in
integrated markets from one financialmarket to other financial markets (Jebran et al.,2017).
According to portfolio theory of Markowitz (1952), people should diversify their investments
and portfolio made on risk-return relationship. Investors must invest in those assets, which
offer higher expected returns at a given level of risk. According to his theory, the assets in
portfolio diversification shouldbe non-correlated. This indicates that if selected assets have
no correlation then shock occuring in one asset may not transfer to other assets; in this way
the risk of investment can be minimized and profit can be maximized. This portfolio theory
encouraged many researchers and stakeholders to investigate linkages across national
stock markets around the world. The knowledge about linkages of different equity markets
help investors in diversification of their investments because if markets are correlated then
shocks in one market can affect the other market. For instance, the recent global financial
crisis (2007) that was not limited to that market in which it occurred but also spread to other
countries of the globe (Kumar, 2013;Jebran, 2018).
The recent sub-prime mortgage crisis of 2007-2009, it is commenced in August 2007 when
the USA real estate bubble burst and quickly spread to both developed and emerging
economies (Claessens et al.,2010). Since the great depression of 1930s, the global
financial crisis is the worst crisis which rapidly led to a sharp decline in USA stock market
indices and around the world financial markets. The global financial crisis initiated due to
the bankruptcy of Lehman Brothers in September 2008, which spread rapidly to almost all
advanced and emerging economies(Dungey and Gajurel, 2014).
Over the years, South Asiais one of the fastest growing regions with average GDP growthof
7% in 2015. India is the bright spot in the region with 7.4% GDP growth rate by 2017. The
Bombay stock exchange (BSE) of India is one of the fastest growing and South Asia’s
oldest stock exchange. The BSE is the world’s 10
th
largest market, with a market
capitalization of more than $2.2tn at April 2017 (world federation of exchanges and BSE
2017). The market of Pakistan has always been important strategically and economically.
The Pakistani stock market gained 9,843 pointsfrom 32,683 to 42,526 in 2016, generating a
30% of return for investors. Pakistan recorded GDP growth as 5.3% in the fiscal year 2016-
2017, which is higher as compared to last year (2015-2016). The USA stock market lost
about 40% of its market capitalization during theeconomy downturn period 2007-2009. The
reason for selecting Indian, Pakistani and Sri Lankan stock markets is that these South
Asian countries have been best emerging economies in the region; due to increase in
financial integration, globalization and liberalization of financial markets, there can be
chances of global financial crisis spillovereffects on these economies.
This study objective is to investigatethe spillover effects of global financial crisis 2007-2009
on South Asian emerging economies and cointegration among these markets and the USA
market. To achieve the objectives of this study,we have analyzed separate samples of data
for the pre, during and post-global financial crisis periods to find the fluctuating patterns in
terms of volatility spillover and cointegration among stock market of the USA and three
emerging markets of South Asia. To the best of our efforts, we have not found any other
study that has selected thesestock markets entirely focusing on this study objectives.
PAGE 780 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 14 NO. 5 2020
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