Do Stock Markets Provide Diversification? A Case Study of South Asian Countries

Abstract

The essential goal of this study is to compute the long run relationship between emerging market of India (SENSEX) with frontier markets of KSE 100 and Colombo stock exchange by taking weekly values from stock return prices for 2000-2014. The technique of Johanson co-integration, Granger causality test, and Variance Decomposition Test are applied. The results of this study reveal that emerging market of India (SENSEX) has no long run relationship with frontier markets (KSE, CSE). This study is helpful for investors to enhance their returns by diversifying the unsystematic risk at given level of profit.

Key words: Diversification, Emerging and frontier markets, unit root test, Co-integration test

JEL CLASSIFICATION: G10; G20