Co-integration of Bangladesh stock market with India, emerging and world stock market indices.

Abstract

The stock market is one of the influential indicators for the potential growth of a country. The performance of a stock market is associated with different types of variables such as economic, political, social etc. Stock return is also depending on the efficiency (strong, semi-strong and weak) of the market. This is why the investors are, nowadays, trying to diversify their investment portfolios by investing in different stock markets. However, there were not so many research work done before on the Bangladesh stock market co-integration. In this research work, India was only individual country examined, along with Emerging and World stock indices, due to the reason that Bangladesh has a large volume of trade, larger trade deficit and a neighbouring country.

In this research work of co-integration of Bangladesh stock market, the dependent variable, there are four independent variables which are Indian stock index, Emerging stock index, World stock index and Bangladesh currency exchange rate. A 10 year (2005–2014) daily price index data set was examined. First of all, ADF and KPSS test conducted on the calculated returns to find out the feasibility of the data. Then the Johansen co-integration test and Vector Error Correction Model (VECM) test were conducted to find out the linkage of Bangladesh stock market.

The finding of this research suggested that there was a long-run linkage of Bangladesh stock market with India, Emerging and World stock indices as well as a short-run linkage with Bangladesh currency exchange rate. Information of one of the discussed market can be used in the Bangladesh stock market to make a profit but, however, investors’ portfolio in Bangladesh market may be affected by the other markets.