Sectoral Integration and Domestic Portfolio Diversification in the Karachi Stock Exchange

Abstract

This study analyzes sectoral integration among the top ten sectors listed on the Karachi Stock Exchange (KSE), using a market value-weighted index and daily stock price data for 2001–14. Since the literature shows that domestically diversified portfolios outperform globally diversified ones, the study’s results have implications for the construction of well-diversified domestic portfolios among individual and institutional investors. We find that, apart from automobiles and cement, all other sectors listed on the KSE provide good diversification opportunities. The Granger causality test shows that cement, chemicals and banking cause most other sectors uni-directionally, while oil and gas, biotechnology and pharmaceuticals, textiles, and electricity are caused by most other sectors. From a domestic investor’s perspective, the KSE provides reasonable diversification opportunities across different sectors.