Stock Returns and Volatility Cross-Spillover Effect Between Sri Lanka And Asian Stock Markets

Abstract

Sri Lanka holds a pivotal position in the Indian Ocean, fostering significant economic ties with South Asia, the Middle East, and Africa. This study examines the financial linkages and stock market behavior between Sri Lanka and key Asian economies (India, China, Pakistan, and Japan) from 2015 to 2021. Using daily stock prices from Bloomberg.com, the analysis employs the EGARCH (1,1) model to assess return and volatility spillovers. Results reveal negative return spillovers from India to Sri Lanka and cross-volatility spillovers from India, China, Pakistan, and Japan to Sri Lanka. Conversely, Sri Lanka exhibits negative return spillovers to India and Pakistan and cross-volatility spillovers to China and Japan. Sub-analysis identifies structural breaks in December 2019, indicating shifts in spillover dynamics pre- and post-Covid-19. These findings offer insights for investors, policymakers, fund managers, and governments to optimize investment strategies, formulate stable policies, and enhance portfolio diversification.