An Empirical Examination of Dynamic Linkages of Banking Sectors of Select Countries

Author(s): Dr. MD Mobashshir Hussain

Abstract:

Banking supports an economy, and when it's integrated across economies, financial crises can spread. This study investigates banking sector integration in India, the US, the UK, China, and Japan. I use weekly data from January 4, 2021 to April 25, 2023 to do this. I then develop portfolios of carefully selected banking equities from each country with identical weights. I use the Autoregressive Distributed Lag (ARDL) Model with bound testing methods from Pesaran and Shin (1999) and Pesaran, Shin, and Smith (2001) to assess the long-term connection. My data shows no cointegration in banking sector stock portfolios. There is no common factor affecting portfolio pricing, and there is no long-term correlation between banking sectors in the selected countries. However, pairwise autoregressive distributed lag (ARDL) bounds tests show cointegration between UK-India. I use Granger causality analysis to identify short-term effects. My findings show that bank portfolio returns of one country do not affect those of other countries, except for the United States and United Kingdom, which have a significant causal effect on India and China at a 10% significance level.

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