Dynamic Connectedness across Equity, Currency, and Commodity Markets in South Asia: A Time- Varying Parameter Vector Autoregressive Approach

Abstract

This study examines the dynamic return spillovers among major South Asian financial markets, including equity indices from India (NIFTY50R), Pakistan (KSER), and Sri Lanka (SLASPIR), as well as key global commodities such as Brent crude oil (BrentR) and gold (GoldR), and the relevant exchange rates (USDINR, USDPKR, and USDLKR). Using the Time-Varying Parameter Vector Autoregressive (TVP- VAR) connectedness approach, the analysis covers the period from March 2, 2005, to February 29, 2024, providing insights into how financial shocks propagate across these interconnected markets over nearly two decades. The findings reveal that the Indian equity market (NIFTY50R) and the Indian Rupee exchange rate (USDINR) serve as significant transmitters of shocks within the South Asian region, influencing other regional markets. Conversely, the Sri Lankan (SLASPIR) and Pakistani (KSER) equity indices are identified as net receivers of shocks, indicating their vulnerability to external financial disturbances. The study also highlights the pivotal role of Brent crude oil prices (BrentR) in driving spillovers, particularly affecting the Indian financial markets. The study's findings have significant implications for understanding the complexities of market interconnectedness in South Asia, particularly in the context of global economic integration.