Cointegration of East Asian, Indian and European Markets– A Study of Impact on Indian Bourses

  • J K SACHDEVA Visiting Faculty SNDT Women University Mumbai
  • Jyoti Nair Faculty-Finance, N. L. Dalmia Institute of Management Studies and Research, Mumbai, India
Keywords: International Stock Markets, Cointegration, Ganger Cause, Asian markets, European Markets, Nifty

Abstract

The association among equity markets of developed countries has long been a popular research area for researchers and investors across the globe with a view to discover the co- movement among the equity markets. The interest in stock market linkages has been motivated by a number of reasons, the most important of which is to explore better returns in short time by portfolio investors. Indian investors, both retail and institutional, watch East in the morning before trading starts at the stock exchanges to get a clue for short term movement of market. Investors observe that East Asian markets have impact on the Indian market during morning sessions while they watch West (European markets) in the afternoon as these markets have also short-term impact on Indian bourses.This paper is an attempt to observe the short term impact and long-term impact of East Asian and European stock market on Indian bourses especially National Stock Exchange Index (Popularly known as Nifty). Five indices from East Asian Economies viz HANG SENG (Hong Kong), STI (Singapore), TSEC (Taiwan), SET (Thailand), and KOSPI (South Korea) and five Europeon Indices viz FTSE 100 (England), Euronext 100 (Europe), CAC 40 (France), DAX (German), Swiss market Index (Switzerland) have been selected for the purpose of this study. After testing the series for stationarity, Johansen’s Cointegration test and Vector Error Correction Mechanism are used to test the long term and short-term causality among the chosen indices. If series were not cointegrated Granger Causality test was applied. It was observed that series are cointegrated at very short-term level but for longer period they are not cointegrated. For longer period, they influence others. VAR Granger Causality Test and Pairwise Granger Causality reveal that Hang Sang, KOSPI, STI and TW (TSEC of Taiwan) impact Nifty Open prices. Nifty influences only TW. KOSPI influences Hang Sang and SET. SET influences KOSPI and TW. Similarly, VAR Granger Causality Test and Pairwise Granger Causality also reveal Nifty closing prices influence CAC, DAX, FTSE, Euronext and SMI against the common hypothesis that Nifty closing prices are influenced by these indices. Further FTSE is influenced by CAC, DAX and SMI. SMI is influenced by Euronext and FTSE. To generalise, markets are integrated and impact each other. Asian markets influence Nifty and Nifty influences European markets. Study will help both domestic and foreign investors to decide their strategies for better returns and arbitrage.

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Published
10-04-2018
How to Cite
SACHDEVA, J. K., & Nair, J. (2018). Cointegration of East Asian, Indian and European Markets– A Study of Impact on Indian Bourses. Journal of Global Economy, 14(1), 3-27. Retrieved from http://www.rcssindia.org/jge/index.php/jge/article/view/490
Section
Articles