University of Dundee DOCTOR OF PHILOSOPHY An analysis of market efficiency in the South Asian emerging stock markets Bangladesh, India, Pakistan and Sri Lanka Khan, Muhammad Award date: 2013 Link to publication General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal Take down policy If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. Download date: 26. Sep. 2021 DOCTOR OF PHILOSOPHY An analysis of market efficiency in the South Asian emerging stock markets: Bangladesh, India, Pakistan and Sri Lanka Muhammad Khan 2013 University of Dundee Conditions for Use and Duplication Copyright of this work belongs to the author unless otherwise identified in the body of the thesis. It is permitted to use and duplicate this work only for personal and non-commercial research, study or criticism/review. You must obtain prior written consent from the author for any other use. Any quotation from this thesis must be acknowledged using the normal academic conventions. It is not permitted to supply the whole or part of this thesis to any other person or to post the same on any website or other online location without the prior written consent of the author. Contact the Discovery team ([email protected]) with any queries about the use or acknowledgement of this work. AN ANALYSIS OF MARKET EFFICIENCY IN THE SOUTH ASIAN EMERGING STOCK MARKETS: BANGLADESH, INDIA, PAKISTAN AND SRI LANKA MUHAMMAD NIAZ KHAN A THESIS SUBMITTED TO THE UNIVERSITY OF DUNDEE IN FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY FEBRUARY, 2013. SCHOOL OF BUSINESS UNIVERSITY OF DUNDEE DUNDEE, SCOTLAND, UK. This thesis is dedicated to my parents who have supported me all the way since the beginning of my studies. Also this thesis is dedicated to my wife, my daughter (Mahnoor), my son (Muhammad Shayan Khan) and you (the reader). TABLE OF CONTENTS TABLE OF CONTENTS I LIST OF FIGURES VI LIST OF TABLES VII ACKNOWLEDGEMENT X DECLARATION XII ABSTRACT XIII CHAPTER 1: INTRODUCTION 1 1.1: Introduction 2 1.2: Motivation and Contribution 3 1.3: Research Questions and Research Approach 10 1.4: Structure of the Thesis 12 1.5: Conclusion 16 CHAPTER 2: AN OVERVIEW OF THE SOUTH ASIAN STOCK MARKETS EXAMINED 17 2.1: Introduction 18 2.2: Defining Emerging Markets 19 2.3: Can South Asian Markets Be Considered Emerging? 22 2.4: The Economic Performance of the South Asian Countries 27 2.5: Liberalisation in the South Asian Stock Markets 35 2.6: South Asian Stock Exchanges 41 i 2.7: Conclusion 49 CHAPTER 3: REVIEW OF THE LITERATURE 50 3.1: Introduction 51 3.2: An Overview of the Efficient Market Hypothesis 54 3.3: Emerging Stock Markets Integration and the Implications for Investment 57 3.4: Macroeconomic Variables and Share Returns in Emerging Markets 71 3.5: Return and Volatility Spillovers in Emerging Stock Markets 81 3.6: International Portfolio Diversification 89 3.7: Conclusion 96 CHAPTER 4: RESEARCH METHODOLOGY AND METHODS 98 4.1: Introduction 99 4.2: Philosophical Assumptions Underpinning Social Science Research 100 4.3: Research Assumptions Underpinning the Current Thesis 109 4.4: Research Methods 111 4.4.1: Cointegration Analysis 112 4.4.1.1: Stationarity Tests 112 4.4.1.2: Johansen Multivariate Cointegration Test 114 4.4.1.3: The Granger Causality Test 118 4.4.1.4: Variance Decomposition and Impulse Response Function Analysis120 4.4.2: Principal Components Analysis 122 4.4.3: The Multivariate GARCH-BEKK Model 125 ii 4.5: Conclusion 129 CHAPTER 5: STOCK MARKET INTEGRATION AND DYNAMIC LINKAGES BETWEEN THE FOUR SOUTH ASIAN EMERGING STOCK MARKETS 131 5.1: Introduction 132 5.2: Data and Descriptive Statistics 133 5.3: Stationarity Test Results 140 5.4: Cointegration Analysis 148 5.4.1: Implications for Portfolio Diversification and Market Efficiency 152 5.5: The Vector Error Correction Model (VECM) 154 5.6: Granger Causality Tests 159 5.7: The Analysis of Variance Decomposition 161 5.8: The Generalised Impulse Response Function Analysis 166 5.9: Conclusion 172 CHAPTER 6: THE RELATIONSHIP BETWEEN SHARE RETURNS AND MACROECONOMIC VARIABLES IN THE SOUTH ASIAN EMERGING STOCK MARKETS 174 6.1: Introduction 175 6.2: Macroeconomic Variables and Share Returns: Evidence 178 6.3: Data and Descriptive Statistics 184 6.4: Correlation Analysis 191 6.5: Principal Components Analysis 195 6.5.1: Factor Loadings of the Principal Components 198 iii 6.6: The Role of Local and Global Macroeconomic Variables in the South Asian Emerging Market Share Returns 203 6.7: Conclusion 208 CHAPTER 7: RETURN AND VOLATILITY SPILLOVERS AMONG FOUR SOUTH ASIAN EMERGING STOCK MARKETS 210 7.1: Introduction 211 7.2: Overview of the Literature 212 7.3: Data and Preliminary Analysis 219 7.4: Empirical Results 224 7.5: Sub-Period Analysis 232 7.6: Conclusion 238 CHAPTER 8: CONCLUSION 240 8.1: Introduction 241 8.2: Main Findings 243 8.3: Limitations of the Study 247 8.4: Suggestions for Future Research 250 8.5: Conclusion 252 APPENDICES 253 Appendix 5.1 254 Appendix 5.2 256 Appendix 5.3 258 Appendix 6.1 260 iv Appendix 6.2 260 Appendix 6.3 261 Appendix 6.4 261 Appendix 6.5 262 Appendix 6.6 262 Appendix 7.1 263 Appendix 7.2 264 Appendix 7.3 265 Appendix 7.4 266 Appendix 7.5 266 Appendix 7.6 267 Appendix 7.7 268 BIBLIOGRAPHY 275 v LIST OF FIGURES Figure 4.1: Assumptions about the Nature of Social Science Research 101 Figure 4.2: Four Paradigms for the Analysis of Social Theory 105 Figure 5.1: Bangladesh Price Series 144 Figure 5.2: India Price Series 144 Figure 5.3: Pakistan Price Series 145 Figure 5.4: Sri Lanka Price Series 145 Figure 5.5: Bangladesh First Differenced Series 146 Figure 5.6: India First Differenced Series 146 Figure 5.7: Pakistan First Differenced Series 147 Figure 5.8: Sri Lanka First Differenced Series 147 Figure 5.9: GIRF for the Bangladeshi Market 168 Figure 5.10: GIRF for the Indian Market 169 Figure 5.11: GIRF for the Pakistani Market 170 Figure 5.12: GIRF for the Sri Lankan Market 171 Figure 7.1: Bangladesh Return Series 222 Figure 7.2: India Return Series 222 Figure 7.3: Pakistan Return Series 223 Figure 7.4: Sri Lanka Return Series 223 vi LIST OF TABLES Table 2.1: Economic Statistics and Market Capitalisation Values 26 Table 2.2: Key Economic Indicators of the South Asian Countries, 2005 – 2009 28 Table 2.3: Foreign Investment in the Sample Countries 32 Table: 2.4: Total Imports and Exports Among the South Asian Countries 33 Table 2.5: Official Dates and Details of Stock Market Liberalisation 37 Table 2.6: Foreign Investment Ceiling for Listed Stocks in South Asia, 2008 39 Table 2.7: Historical Developments of South Asian Stock Exchanges 45 Table 2.8: Summary Statistics of South Asian Stock Markets, 1999-2008 46 Table 2.9: Summary Data of the South Asian Markets (S&P/IFCG Indices) 48 Table 3.1: Summary of Studies Showing Integration Among Stock Markets 70 Table 3.2: Summary of Studies Showing the Relationship Between Stock Returns and Macroeconomic Variables 80 Table 3.3: Summary of Studies Showing Volatility Spillovers in Emerging Stock Markets 88 Table 4.1: The Regulation – Radical Change Dimension 104 Table 5.1: Summary Statistics of the Stock index Returns for the Four South Asian Stock Markets for the Whole Sample period 137 Table 5.2: Summary Statistics of the Stock index Returns for the Four South Asian Stock Markets for the First Sub-Period 137 Table 5.3: Summary Statistics of the Stock index Returns for the Four South Asian Stock Markets for the Second Sub-Period 138 Table 5.4: Correlation Coefficients of the Weekly Stock Return Series 140 vii Table 5.5: Unit Root Test Results for the Whole Sample Period and for the Two Sub- Periods…… 143 Table 5.6: Order of Lag Length Selection 149 Table 5.7: Multivariate Johansen Cointegration Test Results 150 Table 5.8: Vector Error Correction Model Results: Whole Period 158 Table 5.9: Vector Error Correction Model Results: Sub-Period 2 159 Table 5.10: Pair-Wise Granger Causality Test Results 160 Table 5.11: Variance Decomposition for the Whole Sample Period 164 Table 5.12: Variance Decomposition for Sub-Period 1 165 Table 5.13: Variance Decomposition for Sub-Period 2 166 Table 6.1: Summary Statistics for Each of the Four South Asian Markets 187 Table 6.2: Summary Statistics of Economic Variables 190 Table 6.3: Correlation Between Share Prices and Macroeconomic Variables (Bangladesh) 193 Table 6.4: Correlation Between Share Prices and Macroeconomic Variables (India) 193 Table 6.5: Correlation Between Share Prices and Macroeconomic Variables (Pakistan) 194 Table 6.6: Correlation Between Share Prices and Macroeconomic Variables (Sri Lanka) 194 Table 6.7: Eigenvalues of, and Proportion of Variance Explained By the PCs 197 Table 6.8(a): Factor Loadings for the Dominant Principal Components 201 Table 6.8(b): Factor Loadings for the Dominant Principal Components 202 Table 6.9: Regression Analysis of the Monthly Share Returns for the Four South Asian Emerging Markets 206 Table 7.1: Estimated Coefficients from the Mean Equation 226 viii Table 7.2: Multivariate GARCH Model for Four South Asian Markets (Whole Sample Period)…… 228 Table 7.3: Estimated Multivariate GARCH Model Coefficients for the Four Markets for the Two Sub-Periods (Mean Equation) 233 Table 7.4: Multivariate GARCH Model for Four South Asian Markets Sub-Period 1 235 Table 7.5: Multivariate GARCH Model for Four South Asian Markets Sub-Period 2 236 ix ACKNOWLEDGEMENTS All praises and thanks be to Almighty ALLAH, the Lord of the worlds, who bestowed me with the ability and desire to achieve my potential in higher education.