Abstract:
Sri Lanka, a pivotal player in the Indian Ocean, maintains robust economic,
diplomatic, historical, trade, financial, and regional ties with various Asian nations.
This paper seeks to investigate the financial connections and stock market
dynamics between Sri Lanka and other Asian countries and employs a two-way
analysis of stock returns and cross-volatility spillover between Sri Lanka and Asian
stock markets, including India, China, Pakistan, and Japan. It also incorporates a
structural break analysis to assess changes in the Colombo Stock Exchange (CSE)
concerning other Asian stock markets before and after the Covid-19 outbreak. The
study utilized daily stock price data from Bloomberg.com, a trusted data source.
This data was used to calculate the daily stock returns for each of the Asian stock
markets. The analysis employed the EGARCH (1,1) model to conduct both the two way analysis and the sub-analysis and focused on a timeframe spanning from 2015
to 2021. The findings reveal negative return spillovers from India to Sri Lanka and
cross-volatility spillovers from India, China, Pakistan, and Japan to Sri Lanka.
Moreover, the study indicates that adverse news from India, Pakistan, and Japan
has a more pronounced impact on the CSE than positive news, while positive news
from China helps alleviate CSE volatility more effectively than negative news.
Conversely, negative stock return spillovers from Sri Lanka to India and Pakistan
are identified, along with cross-volatility spillovers from Sri Lanka to China and
Japan. Notably, adverse news from the CSE affects China and Japan more than
positive news, while the CSE's positive news offsets volatility in India more
effectively than its negative news. The study also underscores the symmetry in the
impacts of both good and bad news from the CSE on Pakistan. In the sub-analysis,
the study highlights structural breaks in the relationships between these countries
and the CSE, particularly before and after the December 2019 COVID-19 surge.
Consequently, the study's results offer valuable insights to make informed financial
decisions and adapt to these complex financial dynamics.
