Is the Indian Stock Market Integrated with the US and Japanese Markets?

Abstract

The paper attempts to understand the interlinkages and causal relationship between the Nasdaq composite index in the US, the Nikkei in Japan with that of NSE Nifty and BSE Sensex in India during the period January 1999 to August 2004, using daily closing data. The Johansen co-integration test is applied to measure the long-term relationship between the two indices and the Granger-causality test is used to check the short-term causal relationship.

The analysis reveals that there is no long-term relationship of the Indian equity market with that of the US and Japanese equity markets. Further, Nasdaq and Nikkei have stronger causal relationship in 1999–2001 which becomes either very weak or disappears in 2002–2004. There seems to be a disassociation in the movements of the Nasdaq and Nikkei with that of the Sensex and Nifty. When the stock markets have no tendency to move together in the long-term and causal effects become weak in the short-term then the markets are segmented and provide ample room for diversification of investments. The recent surge of FII investments to the Indian equity market is primarily a reflection of this trend.

Keywords

Co-integration Granger-causality Stock Market

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