CAUSALITY AND COINTEGRATION AMONG STOCK MARKET INDICES: A STUDY OF DEVELOPED MARKETS WITH SENSEX

doi:10.46281/ijafr.v7.i1.1172

Abstract

The aim of this paper is to examine the existence of degree of interdependence between Sensex and various stock markets of the American and European regions. The study attempts to analyse the dynamic interactions among 22 global indices. The daily closing prices of indices were obtained from the respective stock exchange websites from January 2005 to May 2018.  The normality, stationarity, and causality of the time series were evaluated in the first section using statistical techniques such as the Jarque-Bera statistic, ADF test, and Granger Causality test. The second part of the approach focused on analysing the interdependencies of various stock markets, determining the degree of association, and measuring market efficiency using techniques such as Johansen's Cointegration test, Cross-Correlation test, and Hurst Exponent. The results indicate that there is a significant amount of interdependence between stock markets. It was also observed that there is an association between markets. This study also found bi-directional as well as uni-directional causality among the stock market indices. The study found that interdependence of markets leads to improvements in short-term as well as long-term returns/gains for investors possibly due to international portfolio diversification if there are stronger co-movements of prices across the markets. JEL Classification Codes: G15, F15, F21. &nbsp

Highlights

Integration of international stock indices in last three decades had been observed due to major deliberate unconventionalities beneath which global investment limits were minimized, exchange rate controls were removed, movement of capital was encouraged, exchange of human and technology was endorsed and the fundamental structure of the global markets was distorted
Descriptive Statistics The descriptive statistics show that the mean daily returns of the majority of the indices in the sample were positive, the SENSEX index had the highest returns (0.06) among all the indices, followed by the IPC index, and the OSE index had the lowest (-0.02) among all
The research examined at the co-integration of 22 stock indices from around the world

Summary

Introduction

Integration of international stock indices in last three decades had been observed due to major deliberate unconventionalities beneath which global investment limits were minimized, exchange rate controls were removed, movement of capital was encouraged, exchange of human and technology was endorsed and the fundamental structure of the global markets was distorted. Market integration has been promoted through liberalization, which has critical implications on investment decisions and policies. There is a huge amount of consideration given to the scrutiny of relationships among the international stock indices. The home country or index can be connected with global stock indices through financial integration. With the increased integration among the markets, it is possible to diversify the risk in a better way. Cost of financial contagion and crisis can be avoided by global financial openness (Park & Lee, 2011)

Objectives

Methods

Results

Conclusion