Asian Journal of Research in Business Economics and Management
Year : 2012, Volume : 2, Issue : 11
First page : ( 42) Last page : ( 80)
Print ISSN : 0000-0000. Online ISSN : 2249-7307.

Co-integration and efficiency in stock markets: Evidence from Bangladesh and its major trading partners

Masuduzzaman Mahedi

Finance Division, Ministry of Finance, Bangladesh.

Online published on 3 November, 2012.

Abstract

The present study will strive to explore whether the Bangladesh stock market is co-integrated with the stock markets of its major trading partners (China, Germany, India, Japan and US) under the influence of globalization and recent financial crisis and the scope of portfolio diversification within the selected stock markets. This paper also examined whether the chosen markets are collectively and individually weak form efficient. Avoiding problem associated with non-synchronous trading, weekly stock price indices have been chosen rather than daily indices for the period spanning from January 2000 to April 2011. Since last eleven years world economy experienced different structural changes and financial crisis, so the sample period has been split into two sub-samples to assess whether the characteristics of the sample before and during the financial crisis are the same. Applying ADF and PP tests, we have examined the stationarity of the time series data. For robustness of hypothesis test, we will use different econometric techniques such as Engle-Granger, Johansen bi-variate and multivariate and Granger Causality tests. Applying Runs and Variance ratio test, we have also investigated the individual weak form market efficiency. Before and during the recent financial crisis there was no evidence of cointegration found between Bangladesh and its leading trading partners’ stock markets. The Bangladesh and its selective trading partners’ stock markets may be drifted arbitrarily way from each other in the long run. We have also found that Bangladesh market is not individually weak form efficient but collectively efficient. The Bangladesh stock market may create an opportunity for the potential investors to gain benefits from portfolio diversification even after the financial crisis. The outcome of this study may be important for both government policy and potential investors.

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Keywords

Diversification, Portfolio, Stock market, Bangladesh, Efficient, Investor.

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