A Study of Interlingages between the Indian Stock Market and Some Other Emerging and Developed Markets

Abstract

After the liberalization of the Indian capital market its integration with international financial markets has grown. Here, we examine the comovement of the Indian stock market with developed markets like US, Japan and other Asian market, using daily data for the period January, 1999 to June, 2004, and tools like pairwise and groupwise cointegration and Granger-causality tests. We find that the US market may not be playing a unique role in integration of Asian markets. The Indian market had so far not been considered in studies on regional integration; thus our study yields an interesting result that, excluding the Indian market from the set of Asian markets leads to no or fewer cointegrating relations; this indicates a unique role of India in the degree of linkages of these stock markets during the recent period of more open capital markets, where FII investments play a key role in synthesizing markets across a region. The degree of integration that is found to be not very high implies that the nature of integration with emerging Asian markets does not yet warranty any immediate concern for India regarding possible contagion and also shows that there is still much scope for reaping benefits of portfolio diversification, by investing in Indian markets.

Keywords: Indian stock markets, interlinkages of stock markets, Emerging markets, Comovements of markets. Market integration