Stock Market Interlinkages: A Study of Indian and World Equity Markets

Abstract

This study investigates the long-term interlinkages among the Indian stock market with that of other developed as well as emerging countries and has tried to explore the possibility of potential diversification benefits for foreign investors to participate in the Indian equity market. This study applies the Engel-Granger (Engel and Granger, 1987) test of causality and cointegration and the Geweke [J. Am. Stat. Assoc. 76 (1982) 304] measure of feedback to empirically investigate the hypothesis that the Indian stock market is not cointegrated with other national markets in the long run and there is no cause and effect relationship among those markets. Our results, based on the daily data from January 1996 to June 2004, ensure that except in case of Indonesia, Malaysia, Philippines, Korea, Thailand and Greece, none of the developed as well as emerging countries selected in this study are integrated (in the long run) with Indian stock market. Though, the Geweke statistics show that there are some contemporaneous and/or lead-lag relationships among those markets in a short period of time and such relationship varies from period to period. Therefore, there is a greater chance for the international investors to enhance their potential diversification benefits through allocating a part of their resources in the Indian equity market.

Keywords: Interlinkages, portfolio diversification, market efficiency

JEL Classification: G14