Towards the environment of legitimacy: Do the institutional quality and policy uncertainty matter for the performance of stock markets of South Asian countries?

PurposeThis paper assesses the environment of legitimacy by determining the role of institutional quality and policy uncertainty on the performance of five major South Asian stock markets (India, Pakistan, Bangladesh, Sri Lanka, and Nepal) using 21 years data from 2000 to 2020. The focus of this study is to approach the issue of the environment of legitimacy that leads to sustained market returns.Design/methodology/approachPanel cointegration tests of Kao and Pedroni are applied, and the Dynamic Panel Vector Autoregressive (PVAR) model is used to determine the estimates.FindingsADF P-Values of both Kao and Pedroni tests show that the panels are cointegrated; the statistical significance of the results of the Kao and Pedroni panel cointegration test confirms cointegration among the variables. After determining the most appropriate lag, the analysis is done using PVAR. The results indicate that institutional quality, policy uncertainty, and GDP positively affect stock market return. Meanwhile, government actions and inflation negatively affect stock market returns. On the other hand, stock market return positively affects institutional quality, government action, policy uncertainty, and GDP. While stock market return negatively affects inflation.Research limitations/implicationsThe sample is taken only from a limited number of South Asian countries, and the period is also limited to 21 years.Practical implicationsBased on our research findings, we have identified several policy implications recommended to enhance and sustain the performance of stock markets.Originality/valueThis paper uses a unique analytical tool, which gives a better insight into the problem. The value of this work lies in its findings, which also have practical implications and theoretical significance.