International Diversification Benefits between Indian, US and Japanese Stock Markets

Abstract

This study investigates the diversification benefits between the Indian, US and Japanese stock markets for the period January, 2000- February, 2008. Firstly tri-variate Johansen cointegration is run to see for the presence of long term cointegration. No co integrating vector is found among the three stock markets. Then Granger causality is run and it is found that Indian stock market granger causes Japanese. Japanese and US stock market seems to granger cause each other. Lastly tri-variate VAR is used to diagnose the return spillover between the stock markets. It is found that there is significant return spillover from Indian and US stock market to Japanese stock market. There is also significant influence of Japanese stock market on US stock market. However, there seems to be no return spillover on the Indian stock market from either the US or the Japanese stock market.

Keywords: Indian stock market, tri-variate Johansen Cointegration, Granger causality, tri-variate VAR, return spillover

JEL Classification: C32, G11, G15