A Cointegration Analysis of the Pakistan Stock Exchange with Emerging Markets

Abstract

The study aims to investigate cointegration of PSX with emerging stock markets. To test the hypotheses in the study, monthly closing data of selected stock market returns for a period of 20 years from January 2001 to December 2020 were collected from different sources such as Yahoo Finance, Business Recorder and the World Bank. The study is based on the data collected during the research period to investigate seven stock markets that are developing. A time series diagnostic test was carried out to conduct the inquiry. As per the study, in terms of returns as well as volatility, Pakistan Stock Exchange (PSX) has the highest returns and volatility over other emerging markets. The correlation research shows that there is a weak correlation between the PSX and most of the stock markets. The data is at rest at the first difference, as results of the Phillip Peron and Augmented Dickey-Fuller tests indicate. As for the cointegration analysis, it is found that three cointegration relationships exist among the variables or series of all the main emerging stock markets. The lead-lag relationship then was checked by calculating the Granger causality test on the returns series of the stock market. "We find that there is a lead-lag relationship between PSX and certain markets." A vector error correction model is used to quantify the rate of adjustment of shocks. The results indicate that PSX adapts to some developing stock markets in a short period of time. Findings of the study indicate that there are equities that are more affected by shocks in the short term. The article relies on impulse response test to visually determine the rate of adjustment. Future research directions, limitations, recommendations and managerial implications are also addressed.