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Sustainability 2019, 11(2), 303; https://doi.org/10.3390/su11020303

Stock Market Integration of Pakistan with Its Trading Partners: A Multivariate DCC-GARCH Model Approach

1
College of Finance, Nanjing Agricultural University, Nanjing 210095, China
2
School of Business Administration, Shaheed Benazir Bhutto University, Shaheed Benazirabad, Nawabshah 67450, Pakistan
*
Authors to whom correspondence should be addressed.
Received: 27 November 2018 / Revised: 19 December 2018 / Accepted: 29 December 2018 / Published: 9 January 2019
(This article belongs to the Special Issue Sustainable Financial Markets)
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Abstract

A decade after the global financial crisis, the developments in stock market integration have increased the stability and liquidity of markets, and decreased the diversification benefits for investors. International trade is an important determinant of stock market interdependence. The objective of this study is to analyze the co-movements and the portfolio diversification between the stock markets of Pakistan and its top trading partners, namely China, Indonesia, Malaysia, the United Kingdom, and the United States. We employed Dynamic Conditional Covariance (DCC)-Generalized Autoregressive Conditional Heteroscedasticity (GARCH) methodology with student t-distribution to examine time-varying correlation and volatilities of stock markets of Pakistan and its trading partners. We used Morgan Stanley capital international (MSCI) daily returns data of developed and emerging markets for the period 2005 to 2018. The results of the study highlighted that stock markets of Pakistan and its trading partners were closely integrated during the financial crisis of 2008, while the integration among stock markets decreased substantially after the period of financial crises. Furthermore, the results showed the slow decay process. Therefore, it is a positive sign for the Pakistani and international investors to diversify their portfolio among the stock markets of Pakistan and its trading partners. View Full-Text
Keywords: stock market integration; international trade; DCC-GARCH model; portfolio diversification stock market integration; international trade; DCC-GARCH model; portfolio diversification
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Joyo, A.S.; Lefen, L. Stock Market Integration of Pakistan with Its Trading Partners: A Multivariate DCC-GARCH Model Approach. Sustainability 2019, 11, 303.

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