Impact of Safta on Capital Market Integration of South Asia: Evidence from Cointegration Analysis

Abstract Regional Trade agreements (RTAs) are increasing worldwide because of associated economic benefits such as increased cross border investment and trade, development and integration markets. This paper investigates how South Asian Free Trade Agreement (SAFTA) impact on the integration of South Asian capital markets. Weekly data of capital market indices of three countries (India, Pakistan and Sri Lanka) have been analyzed for overall (1998-2017) and two sub periods, 1998-2006 (Pre SAFTA) and 2009-2017 (Post SAFTA). Correlation coefficients, Unit root tests and Johansen and Juselius (JJ) Cointegration technique has been applied to access the integration between the markets. The main findings suggest that integration between the South Asian capital markets has been increased in Post-SAFTA period. The evidence that SAFTA pact results in increased integration of regional capital markets has important implications for investors and policymakers.