Commonalities of Equity Market Fundamentals and Return Comovements: An Emerging and Frontier Market Perspective

Resumo

Objective: To explore the bilateral relationship of trading volume, market size differential, foreign portfolio equity holdings and interest rates with international stock market co-movements.

Background:  Stock returns are based on the market fundamentals of companies according to traditional literature on finance however international equity markets share interconnectedness with each other. Return co-movements between any two markets therefore, are based not only on any single market fundamentals but on the bilateral relationship among stock market’s fundamentals.

Method: We select ten Asian emerging and frontier equity markets from January 2000 to December 2014 using panel co-integration techniques. Pakistani equity market is selected as a home country with which bilateral equity co-movement of other markets is analyzed.

Results: Long run relationship between bilateral equity market co-movement and its determinants are reported. In short-run only bilateral trading volume and exchange rate differential between the two countries have significant impact on bilateral equity co-movement.

Contributions: Our study has implication for policy makers, institutional and individual investors. Understanding these relationships between bilateral equity market co-movement and its determinants can help investors to gain diversification benefits keeping in view the associated bilateral co-movement, its determinants and their underlying relationship.