the integration of the pakistani equity market with international equity markets: an investigation

THE INTEGRATION OF THEPAKISTANI EQUITY MARKET

WITH INTERNATIONAL EQUITYMARKETS: AN INVESTIGATION

FAZAL HUSAIN1* and REZA SAIDI2

1Pakistan Institute of Development Economics, Islamabad, Pakistan2Department of Economics and Business, Catholic University of America, Washington, DC, USA

Abstract: This paper investigates the integration of the equity market in Pakistan with

those in other countries. In this context, seven major equity markets, that is, the markets

of USA, UK, France, Germany, Japan, Hong Kong, and Singapore were selected for

the analysis. The integration was examined through co-integration analysis using weekly

country indices from January 1988 to December 1993. The analysis provides little

evidence of integration of the Pakistani market with international markets. The low level

of integration quali®es the Pakistani market as an attractive diversi®cation tool for

international portfolio managers. Copyright # 2000 John Wiley & Sons, Ltd.

1 INTRODUCTION

The modern portfolio theory, pioneered by Markowitz (1952, 1959), suggests that theinvestor should hold a well-diversi®ed portfolio of several securities which should notbe highly correlated with one another. Moreover, the lower the correlations amongthe securities, the higher will be the bene®ts of diversi®cation. These bene®ts, achievedby investing in only one market, can further be increased by investing in manymarkets, i.e. by diversifying internationally where the bene®ts will be higher if thecorrelations among stock returns in the invested markets are lower.

It is this featureÐ the dependence of the bene®ts of international diversi®cation onthe extent of correlations among marketsÐ that has placed the stock markets ofdeveloping economies, commonly known as `Emerging Stock Markets', in a favour-able position. It has been shown that stock returns in these markets exhibit lowcorrelations not only with those in developed markets but also among themselves.

Copyright # 2000 John Wiley & Sons, Ltd.

Journal of International DevelopmentJ. Int. Dev. 12, 207±218 (2000)

* Correspondence to: Mr Fazal Husain, Pakistan Institute of Development Economics, Quaid-I-AzamUniversity Campus, PO Box 1091, Islamabad 44000, Pakistan.

Agtmael and Errunza (1982), Errunza (1983), Chaudhri (1991), Divecha et al. (1992),Hartmann and Khambata (1993), and others advocate, mainly on the basis of lowcorrelations, that the investment opportunity set should be extended to include theemerging markets stocks. Divecha et al. (1992) and Hartmann and Khambata (1993)further suggest that the optimal international portfolio should consist of about20 per cent of emerging market stocks.

The potential bene®ts of international diversi®cation has also motivated the®nancial circles to investigate the interrelationship among stock markets in di�erentregions of the world. For example, Chan et al. (1992) investigate the linkages amongstock markets in Hong Kong, South Korea, Singapore, Taiwan, Japan and USA;DeFusco et al. (1993) examine the long run diversi®cation potential of thirteenemerging capital markets;1 and Theerathorn et al. (1995) examine the interrelation-ship among stock markets in Australia, New Zealand, UK, Hong Kong, Japan,Malaysia, Singapore and USA. Using Co-integration analysis, these studies do not®nd strong evidence of co-movements of stock prices in the tested markets suggestingthat diversi®cation across these markets could be e�ective.

The purpose of this paper is to investigate the integration of the Pakistani equitymarket with major international equity markets. In this context, seven markets wereselected, that is, the equity markets in USA, UK, France, Germany, Japan, HongKong and Singapore. These markets are considered to be the most in¯uential acrossthe Globe. The integration was examined using weekly country indices in dollar termscovering the period January 1988 to December 1993.

The main equity market in Pakistan, the Karachi Stock Exchange (KSE) has beenin operation for almost half a century.2 However, it has not been an active marketuntil the beginning of 1991 when liberalization measures, particularly the opening ofthe market to international investors, were announced. Since then the market hasmade considerable progress and improved in size and depth.

The internationalization of the Pakistani equity market was previously examinedby Uppal (1993). Using monthly indices for Pakistan, USA, UK, Japan, India,Australia, and Korea, the author used the GARCH (p, q) technique to investigate thespillover e�ects in mean stock return and volatility from these markets to thePakistani market. The results show the evidence of spillover e�ects from the Japaneseand Korean markets.

This paper investigates the relationship between Pakistani and selected inter-national markets using weekly indices and applying co-integration technique, a pro-cedure that measures long-run relationship. Moreover, the impact of the opening ofthe Pakistani market on this relationship is also examined. The paper is organized asfollows. The next section describes the data sources. Section 3 explains the method-ology, whereas, empirical results are evaluated in Section 4. The ®nal section containsthe summary and conclusions.

1 The countries studied were Brazil, Chile, Columbia, Mexico, Venezuela, Korea, Philippines, Taiwan,Malaysia, Thailand, Greece, Portugal, and Turkey.2 The interested readers are suggested to use Mirza (1993) and Khan (1993) for a comprehensiveinformation regarding the evolution, regulations, and operations of the Pakistani equity market,particulary the KSE.

Copyright # 2000 John Wiley & Sons, Ltd. J. Int. Dev. 12, 207±218 (2000)

208 F. Husain and R. Saidi

2 DATA SOURCES

The data consists of weekly country indices of Pakistan, USA, UK, France,Germany, Japan, Hong Kong and Singapore. The sample covers the period fromJanuary 1988 to December 1993. This period enables the examination of the market'sinstitutional changes such as the opening of the market to international investorsin February 1991.

The State Bank General Price Index was used for the Pakistani market. The indexwas obtained from various issues of the `Index numbers of Stock Exchange Securities'an annual publication of the State Bank of Pakistan, the central bank.

For USA, the Standard and Poor (S&P) 500, a widely used index, was used,whereas for all other countries, the Financial Times Actuaries (FTA) US dollarcalculated indices were used for the analysis. The S&P 500 and FTA indices werecollected on-line from Datastream, a UK incorporated data service company.

Finally, the US dollar/Pak rupee exchange rates, to convert Pakistani index indollar denominations, were also obtained from Datastream.

3 METHODOLOGY

It was mentioned above that the bene®ts of international diversi®cation depend onthe degree of relationship among the markets. An easy and quick way to know thisrelationship is to ®nd the correlation matrix that shows the correlations of stockreturns among the markets. As a preliminary analysis, therefore, descriptive statisticsfor the selected markets were computed and the correlation matrix was developed.

The relationship, however, was formally investigated by using the co-integrationanalysis, proposed by Engle and Granger (1987). First, the stationarity of a series wastested by a unit root test. In this context, Augmented Dickey Fuller (ADF) test wasused and three models were estimated.

Model I (with constant and trend)

DYt � a � bt � r*Yt-1 �Xpi�1

diDYtÿi � et

Model II (with constant but no trend)

DYt � a � r*Ytÿ1 �Xpi�1

diDYtÿi � et

Model III (without any constant and trend)

DYt � r*Ytÿ1 �Xpi�1

diDYtÿi � et

where Yt is the country index (in log), and the order of p is determined by thebehaviour of et , i.e. when it becomes a white noise process. The ADF statistic is the t-value associated with the estimated coe�cient of r*. The acceptance of null


Pakistani and International Equity Markets 209

hypothesis (H0 :r* � 0) implies the presence of unit root which in turn impliesnon-stationarity. The test was performed for all the markets, where both the originalseries and the di�erences of the series were tested for stationarity.

The co-integration between the two markets, e.g. Pakistan and USA was tested byrunning the OLS regression, called the co-integrating regression:

PKt � a � bUSt � et

where PKt is the Pakistani index (SBP) and USt is the USA index (S&P 500). Then theseries of residuals, et , from this regression was tested for stationarity.

Stationarity in et implies co-integration between PKt and USt and can be tested inmany ways, as discussed in Engle and Granger (1987). One way is to apply the ADFtest (de®ned above) on et. The second and a quick way is to look at the Durbin±Watson statistic of the co-integrating regression. If it is close to zero then this impliesthat et is not stationary and therefore PKt and USt are not co-integrated. Engle andGranger (1987), though, proposed several methods to test for co-integration, how-ever, recommended the ADF procedure.

The co-integrating regressions, to examine the integration of the Pakistani marketwith other markets, were estimated by regressing the Pakistani index on the index ofeach of the other markets and the hypothesis of co-integration was tested throughDW and ADF.

The acceptance of co-integration between two markets, e.g. Pakistan and USA,implies that there exists a long-run relationship between them. However, thisrelationship may be disturbed by short-run deviations from equilibrium and thus anerror correction model (ECM) may be an appropriate framework for investigatinginformation ¯ow between these markets. The ECM is an extension of the Grangercasualty test where an error correction term is introduced into the test:

DPKt � a1 � r1etÿ1 �Xpi�1

biDPKiÿ1 �Xpj�1

djDUSjÿ1

DUSt � a2 � r2etÿ1 �Xpi�1

biDPKiÿ1 �Xqj�1

djDUSjÿ1

where etÿ1 is an error correction term representing the long-run relationship. r1 and r2are considered the speed of adjustment coe�cients. They also help in assessing thelead/lag structure of these markets. If r14 r2 , this suggests that the Pakistani marketresponds more vigorously to short-run disequilibrium than does the US market.Furthermore, at least one of these coe�cients must be signi®cant in order for theECM to hold. If both coe�cients are signi®cant, this suggests that both markets exerta long-run relationship, that is, there exists a feedback mechanism between thesemarkets. If, however, only r1 is found to be signi®cant, this suggests that the USmarket o� drives the Pakistani market toward long-run equilibrium but not the otherway around. Moreover, these coe�cients must be negative in order for the last periodpositive deviation from long-run trend to have a negative e�ect in this period and thuspushing it back toward the trend.

The lagged terms of DPKt and DUSt , appeared as explanatory variables, indicateshort-run dynamics or cause and e�ect relationship between the two markets. Thus, if



the lagged coe�cients of DUSt appear to be signi®cant in the regression of DPKt , thismeans that the USAmarket a�ects the Pakistani market. Similarly, the opposite holdsif the lagged coe�cients DPKt are signi®cant in DUSt . If none of the lagged coe�cientis signi®cant anywhere this implies that there is no cause and e�ect relationshipbetween the two markets. The ECM was estimated for the markets which were foundto be co-integrated with the Pakistani market.

It was mentioned above that the equity market in Pakistan was opened to inter-national investors in early 1991. To examine its e�ects on the relationship of thePakistani market with others, a dummy variable was used as

PKt � bDt � et

where D � 1 for the period after opening (February 1991 to December 1993). Theseries of residuals, et , from this regression were obtained and were used in the analysisinstead of the original series, PKt .

4 EMPIRICAL RESULTS

To know the linkages of the Pakistani equity market with major international equitymarkets, a brief discussion regarding the characteristics of the selected markets wouldbe useful. Table 1 provides such information. The table shows that the equity marketsin Pakistan, Hong Kong, and Singapore show a signi®cant positive mean return. Inother markets the mean return is not signi®cantly di�erent from zero. Highest meanreturn is shown for Hong Kong, followed by Singapore and Pakistan. Regardingmarket volatility, measured by variances, Japan has the highest volatility, followed byHong Kong and Singapore. Hence Hong Kong is the market with excessive returnsand high volatility.

The coe�cients of skewness in Table 1 indicate that Pakistan is the only market inthe group where the returns are positively skewed. In UK and Japan the returns aredistributed symmetrically (zero skewness). Regarding the peakedness of the distribu-tion, Hong Kong has the highest kurtosis, followed by Pakistan and Singapore. Infact, the kurtosis for Hong Kong is much higher than those for other markets. UK is

Table 1. Descriptive statistics (weekly returns) by markets for the period January 1988 toDecember 1993.

Countries Mean(%) Var.(%) Skew Kurt J-B LB(4) LB(8)

Pakistan 0.282* 0.040 1.007** 3.328** 189.40** 88.64** 93.36**

USA 0.188 0.031 ÿ0.412** 1.826** 49.65** 3.33 4.93

UK 0.138 0.050 ÿ0.015 0.301 1.00 2.37 6.78

France 0.237 0.066 ÿ0.334* 0.567* 9.50** 5.02 9.48

Germany 0.203 0.072 ÿ0.536** 1.184** 31.75** 2.63 6.42

Japan ÿ0.027 0.128 0.004 1.711** 35.90** 0.74 2.76

Hong Kong 0.530** 0.123 ÿ1.837** 8.787** 1137.62** 14.04** 18.28*

Singapore 0.395* 0.082 ÿ0.432** 2.510** 87.40 3.30 5.23

Notes: (1) The indices selected are SBP General Index for Pakistan, S&P 500 for USA, and FTA-Worldindices (in dollars) for other countries.

(2) J-B is the Jarque-Bera test for normality.(3) LB(k) is the Ljung-Box Q statistic at lag k to test for serial dependence.



the only market that does not have any excess kurtosis. In fact, it is the only marketwhere the weekly returns are found to be normally distributed as re¯ected by theinsigni®cant value of the Jargue-Bera statistic, a technique that tests the normality ofa series. In all other markets the normality hypothesis is rejected. The greatestdeparture of observed distribution from normality seems to be in Hong Kong,followed by Pakistan and Singapore. The table further reveals that the markets ofPakistan and Hong Kong exhibit serial dependence. It can be observed that theLjung-Box statistic is much higher in Pakistan indicating that extent of serialdependence is higher in Pakistan.

A preliminary indication of the relationship among capital markets is provided bycorrelation matrix of stock returns which is given in Table 2. The table shows thatPakistani equity market has low and insigni®cant correlations with other markets. Infact, the returns in Pakistani market are negatively correlated with returns in USA,France, Germany, and Japan. The market has the highest and the only signi®cantcorrelation with Hong Kong. The nature of correlations of Pakistani market withother markets o�ers an attractive opportunity to international investors for riskdiversi®cation. It can be observed that the correlations among other markets aresigni®cant and much higher, for example, the correlation coe�cient is as high as 0.735between France and Germany. It appears that European markets are more correlatedwith one another.

Next, all the markets are tested for the unit roots. In this context, the AugmentedDickey Fuller (ADF) test was applied to both the original series (weekly index in log)and the ®rst di�erences of the series. Moreover, three models were tested for thepresence of unit roots in the series. Model I contains both a constant and a trendvariable, model II contains only the constant term, whereas model III does notcontain any constant or a trend variable. The results are reported in Table 3.

The results suggest the acceptance of the presence of unit roots in the original seriesindicating that none of the original series is stationary. However, the presence of unitroots is conclusively rejected in the ®rst di�erences of the series for all the markets inall the models. This suggests that the weekly indices in all the equity markets areintegrated of order one. Since all the series are integrated of same order, there is apossible chance of co-integration among the series.

Since the purpose is to investigate the linkages of Pakistani equity market withother markets, the co-integration analysis was done with reference to Pakistan. In this

Table 2. Correlation matrix for returns (weekly) among the selected markets for the periodJanuary 1988 to December 1993.

Countries Pakistan USA UK France Germany Japan HongKong

Singapore

Pakistan 1.000

USA ÿ0.031 1.000

UK 0.013 0.359** 1.000

France ÿ0.030 0.420** 0.516** 1.000

Germany ÿ0.007 0.348** 0.514** 0.735** 1.000

Japan ÿ0.017 0.309** 0.457** 0.409** 0.423** 1.000

Hong Kong 0.163** 0.217** 0.252** 0.218** 0.248** 0.222** 1.000

Singapore 0.082 0.456** 0.368** 0.358 0.425** 0.389** 0.452** 1.000

Note: **indicates signi®cance level at 1%.



context the Pakistani index was regressed on each of the other market indices and theDurbin Watson (CRDW) statistic was obtained from each regression and arereported in Table 4. Further, the series of residuals was obtained from each regressionand Augmented Dickey Fuller (ADF) was applied to test for the presence of unitroots in these residuals. These results are also reported in Table 4.

As discussed earlier, the hypothesis of no co-integration requires the series ofresiduals from co-integrating regression to be non stationary. If the hypothesis istested by the DW statistic, the null hypothesis (H0 :DW � 0) should be accepted. Onthe other hand, if ADF procedure is used then the null hypothesis of the presence ofunit roots in the series should be accepted. Table 4 shows that both the values ofCRDW and ADF are lower than their respective critical values indicating theacceptance of their respective null hypothesis, which in turn, implies the acceptance ofthe hypothesis of no co-integration. Hence, it can be conclusively said that thePakistani equity market is not co-integrated with other equity markets.

One reason for not ®nding any co-integration with the major international marketsmay be related to the structural shift in the Pakistani market following opening of themarket to international investors. To examine the e�ects of the opening of the market

Table 3. Unit root tests (Augmented Dickey Fuller) by markets for the period January 1988to December 1993.

Countries Original series First di�erences

Model I Model II Model III Model I Model II Model III

Pakistan ÿ2.00 ÿ0.32 1.21 ÿ5.99* ÿ5.93* ÿ5.80*USA ÿ3.07 ÿ1.03 1.85 ÿ18.45* ÿ18.46* ÿ18.23*UK ÿ3.48* ÿ1.41 1.05 ÿ16.41* ÿ16.43* ÿ16.39*France ÿ2.37 ÿ1.94 1.55 ÿ17.52* ÿ17.50* ÿ17.36*Germany ÿ2.01 ÿ1.54 1.28 ÿ18.05* ÿ18.07* ÿ17.98*Japan ÿ2.28 ÿ1.51 ÿ0.19 ÿ17.42* ÿ17.45* ÿ17.47*Hong Kong ÿ1.49 0.86 2.32 ÿ10.14* ÿ10.03* ÿ9.71*Singapore ÿ1.66 ÿ0.14 2.43 ÿ17.64* ÿ17.67* ÿ17.33*Critical values (0.05) ÿ3.43 ÿ2.87 ÿ1.95 ÿ3.43 ÿ2.87 ÿ1.95Note: Critical values are taken from MacKinnon (1991).

Table 4. Cointegration tests for Pakistani market with selected markets.

Countries CRDW ADF

USA 0.026 ÿ1.498UK 0.044 ÿ1.796France 0.013 ÿ0.809Germany 0.010 ÿ0.497Japan 0.038 ÿ1.360Hong Kong 0.035 ÿ1.467Singapore 0.015 ÿ1.116Critical values (0.05) 0.386 ÿ1.950Notes: (1) CRDW is the Cointegrating Regression Durbin Watson statistic.

(2) ADF is the Augmented Dickey Fuller Test.(3) Critical values are taken from Mackinnon (1991).



on the relationship of Pakistani market with other markets, correlation of returns inPakistani equity market with returns in other markets was computed for both beforeand after the opening of the market periods. These correlations are reported inTable 5, which does not show any signi®cant di�erences in correlations between thetwo periods.

In order to examine the e�ects of opening on the co-integration analysis, a dummyvariable was used to represent the shift in the market structure. In this context, thePakistani index was regressed on a dummy variable as

PKt � 5.28�19.02�**

Dt

The term in parenthesis is the t-value which is highly signi®cant indicating signi®cantshift in Pakistani equity market after opening of the market. From this regression theseries of residuals was obtained and was used in the co-integration analysis in lieu ofthe original index.

First, the series was tested for the order of integration and was found to be inte-grated of order one. Then the co-integrating regressions were estimated. The resultsare reported in Table 6. The values of CRDW are still lower than the critical valuesuggesting the acceptance of the hypothesis of no co-integration. On the other hand,the values of ADF now indicate the co-integration of the Pakistani market with themarkets of USA, UK, and Japan. Hence, it can be concluded that after accounting

Table 5. Correlations of stock returns in Pakistani market with those in other markets in sub-periods.

Countries January 1988 to February 1991 February 1991 to December 1993

USA ÿ0.045 ÿ0.033UK 0.010 0.017

France ÿ0.0067 ÿ0.012Germany 0.025 ÿ0.023Japan 0.055 ÿ0.055Hong Kong 0.204** 0.154**

Singapore 0.084 0.096

Table 6. Cointegration tests for Pakistani market after incorporating the shift of opening ofmarket.

Countries CRDW ADF

USA 0.068 ÿ2.35*UK 0.092 ÿ2.610*France 0.030 ÿ1.557Germany 0.025 ÿ1.404Japan 0.054 ÿ2.194*Hong Kong 0.064 ÿ1.504Singapore 0.043 ÿ 1.617

Critical values (0.05) 0.386 ÿ1.950Notes: (1) CRDW is the Cointegrating Regression Durbin Watson statistic.

(2) ADF is the Augmented Dickey fuller test.(3) Critical values are taken from mackinnon (1991).



for structural shift in the Pakistani market, the market seems to be co-integrated withUSA, UK and Japan.

The co-integration analysis suggests that there is a long-run relationship betweenPakistani market and each of the markets of USA, UK, and Japan. In order toexplore this relationship further, that is, to know the short-run dynamics as well as thecause and e�ect relationship the error correction model was employed.

Table 7 reports the results of the ECM and shows the relationship of Pakistanimarket with the markets of USA, UK, and Japan respectively. Each set consists oftwo regressions, where the ®rst regression measures the e�ects of a foreign market toPakistani market and the second regression measures the opposite. The errorcorrection term, etÿ1 , represents the long-run relationship, whereas, the laggedcoe�cients of Pakistani and foreign markets represent the short-run dynamics orcause and e�ect relationship. The null hypothesis in Pakistani regression is that all thecoe�cients of foreign markets are zero implying that there are no short-run e�ects offoreign markets to Pakistani market. the hypothesis is tested by F-statistic. Similarly,the foreign market regressions test the hypothesis of the e�ects of Pakistani market toforeign markets. The terms in parenthesis are the respective t-values.

Table 7 shows that the error correction term in Pakistani regression is signi®cant inthe cases of UK and Japan, but not in the case of USA. Hence, the ECM does notendorse the long-run relationship between the markets of Pakistan and USA, shownby the co-integration analysis. It appears that the markets of UK and Japan drive thePakistani market to equilibrium in the long run.

Regarding the short-run e�ects, the only signi®cant co-e�cient found is the thirdlag of USA market in Pakistani regression. In this case, the F-statistic is alsosigni®cant thus rejecting the null hypothesis that all the coe�cients of USA marketare zero. This indicates that there are some spill over e�ects from USA market toPakistani market. In all other cases, the coe�cients are insigni®cant suggesting nocause and e�ect relationship.

5 SUMMARY AND CONCLUSION

The objective of the paper was to investigate the linkages of the Pakistani equitymarket with international equity markets. These linkages are important to both thePakistani government who wants to attract foreign investment, and to internationalinvestors which are interested in emerging markets which provide new investmentopportunities with higher returns and a possibility of risk diversi®cation. In thiscontext, a lower level of integration is favourable.

To explore the linkages, seven equity markets, that is, the markets of USA, UK,France, Germany, Japan, Hong Kong and Singapore were selected. The issue wasinvestigated through correlation analysis, co-integration analysis, and the errorcorrection model, using weekly country indices from January 1988 to December 1993.

The correlation analysis indicates low correlation of returns in the Pakistani equitymarket with those in other markets. Thus, the market may o�er an attractiveopportunity to international investors for diversifying risk.

The co-integration analysis suggests no integration of the Pakistani market withother markets. However, after accounting for the structural shift due to the openingof the market, there is some evidence that the market is integrated with the markets of



Table 7. Error correction models.

Pakistan with USADPKt � ÿ 0.0060 ÿ 0.0213et ÿ1ÿ 0.0060DPKtÿ1ÿ 0.0143DPKtÿ2

(0.34) (1.56) (0.10) (0.24)ÿ 0.0052DPKtÿ3 � 0.0062DPKtÿ4ÿ 1.5767DUStÿ1ÿ 1.1786DUStÿ2(0.09) (0.10) (1.55) (1.16)ÿ 2.4013DUStÿ3 � 1.1667DUStÿ4(2.37)* (1.17)

H0 : coe�cients for US are zeroF � 2.62*Conclusion: rejectDUSt � 0.0022ÿ 0.0010etÿ1ÿ 0.0320DUStÿ1ÿ 0.0380DUStÿ2

(2.14)* (1.25) (0.55) (0.66)0.0297DUStÿ3ÿ 0.0893DUStÿ4ÿ 0.0041DPKtÿ1ÿ 0.0001DPKtÿ2(0.52) (1.57) (1.23) (0.04)0.0017DPKtÿ3 � 0.0061DPKtÿ4(0.50) (1.86)

H0 : coe�cients for PK are zeroF � 1.30Conclusion: accept

Pakistan with UKDPKt � ÿ 0.0143ÿ 0.0283etÿ1ÿ 0.0027DPKtÿ1 � 0.0015DPKtÿ2

(0.82) (2.22)* (0.05) (0.03)� 0.0148DPKtÿ3 � 0.0123DPKtÿ4ÿ 0.8133DUKtÿ1ÿ 0.1769DUKtÿ2(0.26) (0.21) (1.03) (0.22)� 0.2537DUKtÿ3 � 1.2634DUKtÿ4(0.32) (1.59)

H0 : coe�cients for UK are zeroF � 0.96Conclusion: acceptDUKt � 0.013ÿ 0.014etÿ1 � 0.0753DUKtÿ1 � 0.0486DUKtÿ2

(1.02) (1.49) (1.28) (0.82)0.0171DUKtÿ3ÿ 0.0311DUKtÿ4ÿ 0.0021DPKtÿ1 � 0.0018DPKtÿ2(0.29) (0.53) (0.49) (0.43)ÿ 0.0000DPKtÿ3ÿ 0.0022DPKtÿ4(0.01) (0.52)


Pakistan with JPDPKt � 0.0150ÿ 0.0199etÿ1 � 0.0051DPKtÿ1 � 0.0007DPKtÿ2

(0.86) (2.03) (0.08) (0.01)� 0.0002DPKtÿ3 � 0.0039DPKtÿ4ÿ 0.2259DJPtÿ1ÿ 0.1922DJPtÿ2(0.00) (0.06) (0.46) (0.39)ÿ 0.6067DJPtÿ3 � 0.3834DJPtÿ4(1.24) (0.78)

H0 : coe�cients for JP are zeroF � 0.63Conclusion: acceptDJPt � ÿ 0.005 � 0.0016etÿ1 � 0.0031DJPtÿ1 � 0.0220DJPtÿ2

(0.24) (1.33) (0.05) (0.38)0.0542DJPtÿ3 � 0.0020DJPtÿ4 ÿ 0.0099DPKtÿ1 ÿ 0.0011DPKtÿ2(0.93) (0.03) (1.44) (0.16)ÿ 0.0001DPKtÿ3 � 0.0038DPKtÿ4(0.002) (0.54)


Note: Terms in parentheses are t-values.



USA, UK, and Japan which points out to a longer-run relationship of the Pakistanimarket with these three markets.

The error correction model, on the other hand, does not endorse the long-runrelationship of the Pakistani market with the USA market. There seems to be,however, some spill-over e�ects from USA market to the Pakistani market. Thoughthe analysis detects a longer-run relationship of the Pakistani market with the marketsof the UK and Japan, no cause and e�ect relationship could be identi®ed. Theseresults could be driven by common economic factors which make the three marketsmove together in the long run, although the stock markets of UK and Japan do notseem to a�ect the Pakistani market.

In general, the three kinds of analysis provide little evidence of integration ofPakistani market with major equity markets. A lack of integration may thereforequalify the market as an attractive diversi®cation tool for international portfoliomanagers.

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