Market Efficiency and International Diversification: Evidence from India

International Review of Economics and Finance, Vol. 19, No. 2, pp. 313-339, 2010

42 Pages Posted: 27 Apr 2009 Last revised: 30 Aug 2013

Mehmet F. Dicle

Loyola University New Orleans - Joseph A. Butt, S.J. College of Business

Aydin Beyhan

Yeditepe University

Lee J. Yao

Loyola University New Orleans

Date Written: June 2009

Abstract

This study evaluates one of the most important emerging markets, India, for its efficiency and for its potential to offer diversification benefits to international investors. Two of the markets in India are analyzed (Bombay Stock Exchange (BSE) and Indian National Exchange (INE)) for their relationships with the international equity markets based on end-of-day data for individual stocks (35,003 stocks for international markets and 1,522 stocks for Indian markets). Market independence and efficiency is evaluated through evaluation of market as well as individual stock returns. Market-wide tests include; 1) contemporaneous relationship, 2) Granger type causality and 3) day-of-the-week effect. As an evidence of international integration, contemporaneous relationship is strong. Causal relationship is also evident with some of the regional markets as well as with influential international markets. Day-of-the-week effect seems to be a spillover from international markets. Tests on individual Indian stocks include: 1) panel estimation of Granger causality, 2) one-by-one estimation of Granger causality and 3) runs test. 86% of BSE and 91% of INE are Granger caused by at least one international market even after controlling for their liquidity and market returns. Finally, at 5% statistical significance, for runs of 3 (4), about 40% (35%) of the stocks traded on BSE do not change randomly. This level is significantly lower, 19% (16%), for INE with runs of 3 (4). In sum, Indian markets are well integrated with the international equity markets, a characteristic that lowers the international diversification benefits. While day-of-the-week effect is an international spillover, it may be possible to predict individual Indian stocks’ returns through causality with international equity markets and through momentum trading techniques.

Keywords: Day-of-the-week effect, market efficiency, market anomaly, developing markets, Bombay Stock Exchange, Indian National Exchange, India

JEL Classification: G14, G15

Suggested Citation

Dicle, Mehmet F. and Beyhan, Aydin and Yao, Lee J., Market Efficiency and International Diversification: Evidence from India (June 2009). International Review of Economics and Finance, Vol. 19, No. 2, pp. 313-339, 2010. Available at SSRN: https://ssrn.com/abstract=1395343

Mehmet F. Dicle (Contact Author)

Loyola University New Orleans - Joseph A. Butt, S.J. College of Business ( email )

6363 St. Charles Avenue
New Orleans, LA 70118
United States

HOME PAGE: http://researchforprofit.com

Aydin Beyhan

Yeditepe University ( email )

81120 Kayisdagi, Istanbul
Turkey

Lee J. Yao

Loyola University New Orleans ( email )

6363 St. Charles Avenue
New Orleans, LA 70118
United States

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