FACTORS INFLUENCING CO-MOVEMENT OF DIVERSIFIED PORTFOLIO BETWEEN PAKISTAN AND INDIA

An internationally diversified portfolio is effective if the co-movement pattern among underlying securities is analyzed not only on the basis of past returns but also on market and economic factors that can explain such comovements. The current study determines the role of bilateral foreign portfolio equity holding, gross domestic product (GDP) and interest rate differential on international co-movement patterns among emerging and frontier Asian (EFA) markets. We started our analysis by estimating rolling beta estimation used in formulating bilateral co-movement index. After that, ARDL technique is applied to check long term relationship among the included variables. For short term relationship, error correction term is added for measuring speed of convergence toward long run equilibrium. Finally, we applied variance decomposition analysis under the VAR framework to check individual variances of each independent variable on bilateral equity return co-movement. We report significant long run relationship between bilateral equity co-movement and GDP growth differential of Pakistan and India. The presence of short run relationship among all variables with high speed of convergence suggests that the process reverts itself toward the long run. Our findings regarding significance of Gross Domestic Product (GDP) growth differential between India and Pakistan support the portfolio balance theory proposed by Kodres and Pritsker (2002).