Are prolonged conflict and tension deterrents for stock market integration? The case of Sri Lanka

Abstract

This paper investigates stock market interdependencies between Sri Lanka and selected economies in the context of its long civil war using the Dynamic Conditional Correlation (DCC) model with monthly indices (1993-2013) and through bilateral analysis. While correlations are weak, in most cases Sri Lanka's conflict and tensions have not been responsible. China is an exception, coinciding with the common observation that its relationship with Sri Lanka has strengthened. Integrations with the US and Pakistan are also marginally accelerated, although both countries are sensitive to types of risks considered. Finally, the low correlations observed imply diversification benefits to Sri Lankan investors