Tahira Tabassum

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Bangladesh stock market has seen two major crashes where thousands of tiny and unskilled investors lost everything on both instances. At present, when the major stock indices worldwide are integrated, it is important for Bangladeshi investors to check if there is any signal from the global stock market from the international price movement. As globalization progresses, there can be potential opportunities for investors to invest abroad and for this, it is important for potential international portfolio investors of Bangladesh to understand the degree of interdependence and correlation between the world's major stock markets, as well as the influence on the Bangladesh stock market. Although at present, investors cannot invest in the foreign stock market directly from Bangladesh, the door will open in the near future as investors have the potential to invest in the foreign markets. Therefore, it is also crucial to look at the degree of correlation between the major stock markets. In addition, the geopolitical crisis affects the stock market of a country (Mobarek and Mollah, 2012). Although Bangladesh is not integrated with the major global stock indices, it faced the highest single-day loss in almost two years as 'panic-driven' investors scrambled to sell off their shares to pocket the cash due to the ongoing Russia-Ukraine war (Financial Express, 2022). "There is no reason for such sharp falls due to the Ukraine-Russia war as our market is not integrated with global markets," says Faruq Ahmad Siddiqi, the former chairman of the securities regulator. This is the main reason investors need to understand the correlations and integration among the stock markets around the world and the current research aids in a greater understanding of global market integration and the significance of correlation. Due to the enormous inflow of capital in the form of direct and indirect investments, as well as the globalization of the financial system, financial market integration has increased dramatically in recent years (Chen, Mantegna, Pantelous & Zuev, 2018). Many countries tend to be more sensitive to (global) shocks in this new era than they have ever been before, as the magnitude and effects of local and international economic, financial, and political shocks can be transferred more quickly in the financial system, which directly affects the capital market. (Beine, Cosma & Vermeulen, 2011). Policymakers should be aware that there are different levels of financial integration, and each has implications for the country's economic system's consistency as well as the national economy's ability to absorb shocks such as increased volatility in financial market returns or reversals in international capital flows (Park 2017).

This study is to analyze the level of integration of Bangladesh Stock Market-DSE30 with 4 major global indices from US-S&P 500, China-Hang Seng, UK-FTSE100, and Australia- S&P/ASX200 on the basis of the past 2 years' return data. The selected indices have been determined as a representative to measure the level of correlation among 4 different continents- Eastern Asia, Southern Asia, North America, and Oceania.

Table 1: Descriptive statistics for the selected Indices (2020-2022)Table 1: Descriptive statistics for the selected Indices (2020-2022)

The coefficient of variation will help investors to assess how much volatility, or risk, is taken in relation to the projected return on investments. As shown in table-1, the DSE 30 has seen fewer fluctuations, as seen by the lowest coefficient of variation, followed by the S&P 500. When compared to the US index, the European FTSE 100 shows the highest variation. This variation shows, to generate 1% of return the DSE30 investors will incur 8.95% of risk whereas the risk of investing in London stock exchange (FTSE100) exceeds 100% which clearly shows there is more volatility or more significant potential price swings.

Table 2: Correlation of Returns with P-value between DSE 30 and Selected Indices

*p-value less than 0.05 indicating indices have a significant correlation with DSE 30

Table-2 shows the correlation between selected stock indices and DSE 30 with a time delay of 1 to 5days along with the p-value representing the significance of the correlation. The correlation is significant at a 5% level of significance indicating a weak correlation of Bangladesh stock market with major global stock markets. Therefore, the p-value less than 5% reflects that the relation of other indices with DSE 30 is very significant. Here, the table indicates there is no significant correlation between Bangladesh and the global market except for UK and China. Out of 5 lags only lag 4 shows that DSE is significantly correlated with FTSE100 and Hang Seng. However, it indicates a weak positive correlation with UK and China as only 13.56% and 13.06% of the DSE variables can be explained by the variables of FTSE and Hang Seng respectively and this relationship is statistically significant.

In all the cases, the analysis found that with 0-5days of time delay Bangladesh stock market is not significantly correlated with any of the major global stock markets. With lag 4, the only UK and China have been found with statistically significant positive correlation with Bangladesh.  It shows that if the price of FTSE100 and Hang Seng increase, DSE will see a negligible increase in the price in 4 days. Overall, the analysis reflects that Bangladesh stock market is not integrated with the global stock market because the marginal impact of the correlation between DSE and other stock indices is not statistically significant as well. The detailed correlations of lag 4 are shown in table 3.

Table 3: Correlation of Returns between DSE 30 and selected Indices with a time delay of 4 days

*p-value less than 0.05 indicating indices have a significant correlation with DSE 30

Table-3 represents the detailed analysis of the correlation between DSE 30 and other selected indices in lag 4. The ‘p-value less than 0.05 represents the significant correlations among the stock markets. The relationship between DSE and other world major indices is statistically significant at 95% level of confidence. Here, it reveals that there is a strong positive correlation among the selected global stock indices and the correlation is statistically significant but when compared with DSE, it shows no significant correlation with other selected indices. This clearly means other stock markets have high global integration but Bangladesh is yet to be globally integrated. After analyzing the marginal impact, it also shows other global markets have statistically significant integration except for Bangladesh. Therefore, the analysis suggests that there is low participation of investors in the stock market as Bangladesh is a frontier market.

The findings of this study significantly support the theory that Bangladesh and international capital markets are not integrated. For instance, the Bangladesh stock market has fallen twice since the Securities and Exchange Commission was established in 1993. The stock market crash is not unique worldwide; it has occurred in many other nations. Market crashes in other nations, on the other hand, were frequently related to an internal or external economic shock or a global recession. In the case of Bangladesh, however, this has not been the case. Bangladesh's stock market is isolated and is not globally integrated mainly due to the negligible number of foreign investments. The former chairman of the Securities and Exchange Commission says “Both the crashes were neither due to external economic factors nor internal economic malfunctions. These crashes were the results of poor governance, unbridled manipulations, undue influences, and unlimited greed”. This statement also supports the analysis of the study that there is no significant correlation between Bangladesh and other global stock markets. Therefore, the study concludes, as Bangladesh stock market is not integrated, the highly industrialized investors in Bangladesh cannot look for any signal from the international stock movement.

References

Mobarek, A., & Mollah, S. (2016). Global Stock Market Integration. Journal of Arts, Science & Commerce, 3(1). https://doi.org/10.1057/9781137367549

Chen, Y., Mantegna, R. N., Pantelous, A. A., & Zuev, K. (2018). A Dynamic Analysis of S&P 500, FTSE 100 and Euro Stoxx 50 indices under different exchange rates. SSRN Electronic Journal, 13(3). https://doi.org/10.2139/ssrn.2998600

Beine, M. A., Cosma, A., & Vermeulen, R. (2011). The dark side of global integration: Increasing tail dependence. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1342486

Alamgir, F., & Amin, S. B. (2021, January 25). The nexus between oil price and stock market: Evidence from South Asia. Energy Reports. Retrieved February 26, 2022, from https://www.sciencedirect.com/science/article/pii/S2352484721000287?via%3Dihub

Park, C.-Y. (2017, December 7). Asian Capital Market Integration: Theory and Evidence. Asian Development Bank. Retrieved February 26, 2022, from https://www.adb.org/publications/asian-capital-market-integration-theory-and-evidence