International Stock Market Integration and Its Economic Determinants: A Study of Indian and World Equity Markets

Abstract

During the periods of globalization and deregulation, it has become very common for the equity market of a country to respond to the equity movements of its international trading partners from all over the world. The effort, trying to achieve in this study, relates to how Indian equity market responds to the equity price movements of other countries and vice versa. Also, the possible forces behind such interdependence among the markets are investigated. Daily closing prices of all the major equity indices from a sample of 23 countries, including India, for a period of 16 years starting from 1990 to 2005 have been used to assess the co-movement of prices among the markets. The results reveal the following : Apart from exhibiting significant annual contemporaneous measures or same day intermarket relationship among India and most of the other foreign countries, the contemporaneous feedback statistics also reveals an increasing tendency in the degree of integration among the markets over a period of time, leading to a greater co-movements and therefore higher market efficiency at the international scenario. Except for Sri Lanka and Sweden, there is a significant contemporaneous flow of information among India and 20 other foreign countries. The countries from the same region are found to be more integrated than those from the different regions. As far as the unidirectional feedback measures are concerned, though most of the measures for the whole study period are found to be significant, only few annual measures exhibit statistical significance. Interestingly, India has been found to play a stronger leading role for the countries in the Asian region except for Pakistan, Philippines, and Singapore, during the entire study period. At the same time, USA and other five out of ten European countries have been found to strongly lead the Indian market during the same period. But, unlike the contemporaneous measures, there is no fixed trend (either increasing or decreasing) in the movements of the annual unidirectional feedback measures. Thus it is very difficult to conclude that any specific market consistently leads or follows the other market. As far as the pooled regression results are concerned, out of various macroeconomic factors, only some of them including the time trend are found to be significant in assessing the contemporaneous inter-market relation. At the same time, none of the macroeconomic factors, except the volatility in bi-lateral exchange rate and volatility differential among the two markets, are found to be statistically significant in explaining the unidirectional lead-lag relationship among the markets.

Time-shift asymmetric correlation analysis of global stock markets

“…Sasaki et al (1999) identified the significant impact of monetary and credit policies on the interrelationship between the securities markets. Black and Fraser (1995), Bracker et al (1999), Bekaert and Harvey (2000), Bekaert et al (2001), Wu (2001), Pretorius (2002), Liu et al (2006), and Mukherjee and Mishra (2007) showed that the dynamics of stock markets integration depends on monetary parameters such as interest rates, foreign investment, trade, and inflation.…”

International Portfolio Diversification - Role of Emerging Economies-US Integration and Dynamic Linkages: An Empirical Study

“…On the other hand, the Indian BSE Sensex return was also seen to exert some influence on stock returns in some important Asian markets. However, Mukharjee and Mishra (2005) by using the Granger"s causality test and unidirectional Geweke feedback statistics proved the fact that though the Indian stock market have some influence on the stock market of some of the Asian countries, but the stock markets of European and American countries are not at all influenced/caused by it. Choudhry (1997) investigated the Latin American stock markets and the US stock market using cointegration technique.…”

“…However, Agarwal (2000) concluded that there is a lot of scope for the Indian stock market to integrate with the world markets. Mukherjee and Mishra (2007) analyzed 23 markets, and identified increasing tendency of integration among these markets. They also discovered that countries of same region are found to be more integrated than others.…”

Financial Crisis and International Portfolio Diversification: A Principal Component Analysis Approach

“…Mukherjee and Mishra [13] tried to investigate the price co-movement and hence the inter-market relations among India and 22 other foreign countries from all over the world and also to find out the possible forces that affected the evolutions of such international stock market integration among India and other countries. Their study was done by using Geweke (1982) measures of feedback on the daily closing price index data over a period of 16 years from 1990 to 2005.…”