Abstract
The purpose of this study is to explore the nature of the association and the possible existence of a shortrun and long-run relationship between the stock-market indices of South Africa, India and the USA. The idea behind this combination is to know how the stock markets of these three prominent countries are related to each other. The study employs monthly data from the stock indices, namely JALSH (South Africa), NIFTY (India) and NASDAQ (USA) composite from April 2004 to March 2014. After testing for the normality of the data distribution and the stationarity of the time series data, this paper discovered a strong correlation between the stock market indices of South Africa, India and the USA. The correlation among the stock markets is high, particularly between South Africa and India. In addition, the paper attempts to discover the presence of any predictive ability among these markets by applying the Granger causality test. The result indicates that the NASDAQ index has no predictive ability as far as the JALSH and NIFTY indices are concerned. However, the JALSH index has a predictive ability on the NIFTY index. After testing the Granger cause relationship, the existence of a long-run and short-run relationship is tested. The long-run relationships among the stock market indices are analysed, following the Johansen and Juselius multivariate cointegration approach. The result suggests the absence of a long-run relationship among the three stock market indices. Short-run relationship is investigated with the Vector Autoregression (VAR) model, and the outcome obtained shows that both the USA and the South African stock markets are predicted only by their own past lags. However, the Indian stock market is seen to be a function of its own past lags and the past lags of the South African stock index.
Highlights
Globalization has gained momentum over the past two decades
This paper empirically investigates the relationship and the degree of cointegration between the South African, Indian and US stock market indices
The correlation is further verified for the direction of influence by the Granger causality test, which found that JALSH Granger causes NIFTY at the 5 per cent level
Summary
Globalization has gained momentum over the past two decades. Financial markets are at the forefront of this development. In 2013, the global market capitalization increased significantly to USD 64 trillion (17 per cent growth rate) and the value of share trading increased to USD 55 trillion (12 per cent growth rate). Development in multinational companies, advances in information technology, deregulation of financial systems, growth in international capital flows and abolishment of foreign exchange control have increased cross-country correlation, bringing nations together economically (Tehrani, 2011). Inter-linkages among stock markets may bring different risks, such as the contagion effect and ripple effects of economic events in distant countries. These were evidenced during the 2008 subprime credit market crisis in the USA. It is of great academic and practical importance to understand the linkages between the different world stock markets
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