Global Financial Crisis and Stock Market Integration: A Study on the Impact of Global Financial Crisis on the Level of Financial Integration between the US and Indian Stock Markets

Abstract

This article, using the daily returns of the indices of US (S&P 500) and the Indian stock markets (CNX S&P Nifty), examines the impact of the global financial crisis on the level of financial integration between the US and Indian stock markets from March 2005 to November 2010. The article also analyses the existence of cointegration and dynamic relationship between the two indices during the pre-crisis, crisis and post-crisis periods, and in the last five years, using the Johansen Cointegration analysis and the Vector Auto Regression (VAR) Model. The article finds no cointegration between the two indices in all the four periods. The returns from the Indian stock market with reference to the previous day’s return of the US stock market show a lot of feedback effect from the US to India, whereas the returns from the US stock market show no significant reaction. However, in terms of its own past, there is a strong negative reaction due to the overreaction or mean reversion of the stock market during the post-crisis period.