STOCK MARKET INTEGRATION: EVIDENCE FROM INDIA AND OTHER MAJOR WORLD STOCK MARKETS

Transcription

1 Indian Journal of Economics & Business, Vol. 10, No. 4, (2011) : STOCK MARKET INTEGRATION: EVIDENCE FROM INDIA AND OTHER MAJOR WORLD STOCK MARKETS PRADEEP KUMAR PANDA * & DEBASHIS ACHARYA Abstract India has much less exposure in the stock market integration literature until recently. Given India s fast-growing economic influence, research on the Indian stock market still seems to be inadequate and needs further investigation. The present study extends the existing stock market integration literature in the following ways. First, to provide further evidence, we examine the dynamic price linkages and interdependence between the stock market of India and that of the U.S., U.K., Japan, Singapore, Honk Kong, Malaysia, South Korea, Taiwan, and China using daily stock price indices data covering the period January 2, 2001 to November 28, Second, this research examines examine the long-term and short-term dynamic relationship among the stock prices using Johansen-Juselius cointegration, vector error correction model and Granger causality test. Additionally, the innovation accounting analysis is conducted to further investigate the interactions between the Indian markets and others world markets. And lastly, the results from this research provide implications regarding international diversification and market efficiency that are important for investors and fund managers who are interested in investing in these markets. From the study, we can conclude that, Indian market is having a cointegrating relationship with US financial market. But relationship with other financial markets is not well established. Key words: Stock Market, Integration, Global Financial Crisis, Dynamic price linkages andinterdependence I. INTRODUCTION The recent global financial crisis of 2008 reverberated the stock markets across the world, from the Wall Street to the Asian markets, and led to sharp declines in stock markets, currencies and other asset prices. It also threatened countries financial systems and disrupted their real economies, with large contractions in activity. The main impact of the global financial turmoil in India has emanated from the significant change experienced in the capital account in Foreign * Research Scholar, Department of Economics, University of Hyderabad, pradeep25687@yahoo.in ** Reader, Department of Economics, University of Hyderabad, dass@uohyd.ernet.in

2 606 Pradeep Kumar Panda & Debashis Acharya institutional investment (FII) flows are a major driver of Indian stock market. In , net FII inflows into India amounted to $20.3 billion. As compared with this, they pulled out $11.1 billion during the first nine-and-a-half months of calendar year 2008, of which $8.3 billion occurred over the first six-and-a-half months of financial year (April 1 to October 16). There has been a huge net outflow of (FII) from the Indian equity market. Foreign institutional investors, who need to retrench assets in order to cover losses in their home countries and are seeking havens of safety in an uncertain environment, have become major sellers in Indian markets. Given the importance of FII investment in driving Indian stock markets and the fact that cumulative investments by FIIs stood at $66.5 billion at the beginning of this calendar year, the pullout triggered a collapse in stock prices. As a result, the BSE Sensex fell from its closing peak of 20,873 on January 8, 2008, to less than 8000 by November 17,2008. The cumulative market capitalization of Indian shares, which was $1.8 trillion in January, has slumped even more dramatically to $760 billion as the rupee has devalued. In addition, this withdrawal by the FIIs led to a sharp depreciation of the rupee. Between January 1 and November 17, 2008, the RBI reference rate for the rupee fell by nearly 25 per cent relative to dollar from Rs per dollar to Rs The Dollar has also strengthened against most currencies globally, not due to any strength of the US economy, but due to a flight to safety of global capital. The global slow down has impacted the Indian economy, which was witnessed a lower growth rate at 7.6% in the July-September quarter, 2008 as against 7.9% in the previous quarter. In the same quarter last year 2007, the growth rate was 9.3%. The growth rate in the first half of the current financial year is 7.8% as against 9.3% in the same period last year. The IT sector has been badly hit because nearly half of the IT sector firms revenues come from banking and financial institutions. The IT companies have these investment banks as their clients. With the effect of financial crises, IT companies are not able to enhance their business with these investment banks, and, in turn, started retrenching their employees. The ongoing crisis has an adverse impact on Indian banks. The large investment banks originally from the US, had invested substantially in the stocks of Indian banks. The banks, in turn, have invested in derivatives, which might have exposure to these investment bankers. Real estate is badly affected by the current financial downturn. The investment banks had given huge amounts of money to real estate companies for development projects. With the large investment banks going bankrupt, the projects have to be discontinued, leading to the slump in the real estate market as well. Reserve Bank of India reviewed the situation by reducing CRR, SLR and repo rate arising out of the extraordinary global developments triggered by the bankruptcy / sell-out / restructuring of some of the world s largest financial institutions. In recent years, the emerging capital market of India has generated considerable interest among regional as well as global investors largely because of a rapid increase in its level of economic activity. The policy of globalization and financial liberalization initiated by Indian Government in 1991 attracted considerable inflow of foreign investment in India, both in terms of foreign direct investment, as well as portfolio

3 Stock Market Integration: Evidence from India and Other Major World investment. The Indian economy is now a relatively open economy, despite the capital account not being fully open. But the Indian government has continued with moves to make the capital account fully convertible, step by step. The current account, as measured by the sum of current receipts and current payments, amounted to about 53 per cent of GDP in , up from about 19 per cent of GDP in Similarly, on the capital account, the sum of gross capital inflows and outflows increased from 12 per cent of GDP in to around 64 per cent in India has gradually emerged as an important destination of global investors investment in emerging equity markets. India s stable 8-9 per cent growth, rising foreign exchange reserves along with a booming consumer market and easy availability of skilled personnel have been instrumental in attracting several foreign companies to invest in India. Furthermore, India s workforce, demography and technology have contributed immensely to its success in attracting investors. The purchase and sales activities of foreign institutional investors (FIIs) account for three fourths of the average daily turnover in India s stock market. The inflow of foreign funds with entry of FIIs has transformed the style of functioning of the Indian stock market. As of now FIIs are allowed to invest in all categories of securities traded in the primary, secondary and in the derivatives segment including government securities. The Indian companies have been permitted to raise resources from abroad through the issue of Global Depository Receipt (GDR), American depository receipt (ADR) and Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowing (ECBs). Foreign companies are also allowed to tap the domestic stock markets. The investment norms for Non-resident Indians (NRIs), Persons of Indian Origin (PIOs) and Overseas Corporate Bodies (OCBs) have been largely liberalized, inter alia, with permission to purchase of shares without any prior approval from the Reserve Bank of India (RBI). The Reserve Bank of India (RBI) permitted two-way fungibility for ADRs / GDRs, which meant that investors (foreign institutional or domestic) who hold ADRs / GDRs can cancel them with the depository and sell the underlying shares in the market. Nowadays there are many overseas securities listed in various stock exchanges while investors have immediate information from every stock market in the world and are able to conduct transactions everywhere and from everywhere on the planet. The Indian stock exchanges have been allowed to set up trading terminals abroad. The trading platforms of Indian exchanges are now accessed through the internet from anywhere in the world. Ten major Indian companies listed on the New York Stock Exchange (NYSE) account for a 19 per cent weight in the benchmark 30-scrip stock price index of the BSE. Fifty Indian companies are listed on the London Stock Exchange. The globalization of the Indian stock market is reflected in catching up with the best international practices, inter alia, dematerialization of shares, replacement of the Indian carry forward trading system called badla by the index-based and scripbased futures and options; rolling settlement (T+2), electronic open limit order book trading, strengthening of corporate governance practices and enhanced transparency and disclosure standards.

4 608 Pradeep Kumar Panda & Debashis Acharya There are a number of reasons why understanding the international linkages of stock market is important for the investors, investment fund managers, policy makers and academicians. These include international portfolio diversification, stock market efficiency, capital budgeting, formulation of macro-economic policy and financial regulation. First, international investors need to understand the interdependence of stock markets in order to realize the potential risk and rewards of international diversification. Greater integration among world markets implies stronger co-movements between markets, therefore reducing the opportunities for international diversification. The benefit of international portfolio diversification has been well documented by Grubel (1968), Lessard (1973), Levy and Sarnat (1970) and Solnik (1974). Second, evidence of strong linkages and integration among world capital markets may lead to the rejection of the efficient markets hypothesis, because one stock index series may be used to predict the other stock market indices. Third, from the macroeconomic and monetary policies perspective, the study of stock market integration is also important, because market co-movements can also lead to market contagion as investors incorporate into their trading decisions information about price changes in other markets. Fourth, examining the stock market linkages has crucial implication in international capital budgeting. If capital markets are segmented, the cost of capital for a project will depend on where it is to be financed, whereas this cost will be irrespective of the location where it is raised in an integrated world market. If a firm has no choice but to raise its capital in a segmented local capital market, it will probably experience a higher cost of capital than a firm with access to international capital markets because the local investors would require a higher risk-adjusted rate of return on a common stock for a firm with no exposure to international capital markets so as to compensate them for bearing high systematic risk. Increasing integration of capital markets can be associated with several benefits, including development of financial markets and securities market design, and effective price discovery, higher savings, investment and economic progress. It also leads to cross-border mobility of private capital inflows and expands investors opportunities for portfolio diversification and provides a potential for achieving higher risk-adjusted rates of return. At the same time, linkages among capital markets also bring various risks, such as the contagion and associated disruption of economic activities that were evident during the crisis - including the Mexican peso crisis of December 1994, the Asian crisis triggered by the collapse of the Thai Baht in July 1997, the Russia crisis of August 1998, the collapse of the Brazilian Real in January 1999 and the global financial crisis of October India has engaged in various bilateral trade and economic cooperation agreements with several countries and regional groups across Asia and Europe. Although the Indian economy is closely linked to the rest of world through international trade and foreign direct investment, a question remains about the extent of global integration of the Indian stock market. The recent crash in the BSE Sensex triggered by US financial crisis is simply an indicator of the impact of

5 Stock Market Integration: Evidence from India and Other Major World international contagion. It created considerable interest in studying the interdependence and dynamic linkages among national capital markets. The main objective of this paper is to identify which among the stock markets - US, UK, Japan, Singapore, Honk Kong, Malaysia, South Korea, Taiwan, and China - has the strongest influence on the India s stock market. Have the relationships been significantly influenced by events such as the global financial crisis in There are also concerns regarding its exposure to risk in case of a global / regional crisis, i.e. a need to know how far contagion can affect the Indian stock market in a more and more globally integrated environment. The ultimate goal is to suggest investment and policy advice and to assess the extent to which the Indian stock market is integrated into the major global equity markets. To answer these questions, we examine the interdependence and dynamic interactions between the stock price indices of India, and world stock markets of US, Japan, Singapore, Honk Kong, Malaysia, South Korea, Taiwan, and China for the period January 2, 2001 to November 28, 2008 using Johansen-Juselius multivariate cointegration. The results of our analysis may give some indication of the vulnerability of the country s stock market in case of a regional crisis. Although stock market integration among developed countries has been widely studied, research on the international linkages of the Indian stock market is limited. Hence, this study will contribute to the literature on international financial integration by providing an empirical analysis of Indian market. The remainder of this paper is structured as follows. Section II gives a brief review of existing literature relevant to this study. Section III presents the nature, sources and preliminary analysis of the data and also the methodology and presents some theoretical considerations. The empirical results and findings are presented in section IV. Finally, Section V concludes with a summary and policy implications. II. EMPIRICAL EVIDENCES ON STOCK MARKET INTEGRATION The interest in analyzing the integration among the world s equity markets gathered momentum following the October 1987 global stock market crash and the Asian financial crisis in There have been numerous studies that have focused on this issue of equity market interdependence and integration. However, most of these studies pivot on the North American, European and developed markets of the world. International studies concerned with market linkages are relatively common place (see, for example, Arshanapalli and Doukas, 1993; Masih and Masih, 1999; Cheung and Lai, 1999). And regional markets, especially in Europe (Abbott and Chow, 1993; Espitia and Santamaria, 1994; Akdogan, 1995; Meric and Meric, 1997) and Latin America (Chaudhuri, 1997; Christofi and Pericli, 1999) are subject to increasing attention. However, few studies have adopted an Asian regional perspective. Moreover, even where Asian markets are examined in a broader multilateral context (that is, along with North American and European markets) there is generally an emphasis on the more developed Asian economies. For example, Lai et al. (1993), Richards (1995), Solnik et al. (1996), Darbar and Deb (1997), Yuhn

6 610 Pradeep Kumar Panda & Debashis Acharya (1997) and Francis and Leachman (1998) only mentioned Japan in their studies of international stock market linkages, Ramchand and Susmel (1998) added Singapore and Hong Kong, while Kwan et al. (1995) also included Taiwan and Korea. Some few studies which are relevant to the stock market included in this paper are given below. Roca (1999) investigates the price linkages between the equity market of Australia and that of the US, UK, Japan, Hong Kong, Singapore, Taiwan, and Korea using weekly MSCI stock market data covering the period Johansen-Juselius cointegration and Granger-causality tests based on errorcorrection models are conducted. No cointegration was found between Australia and the other markets. However, the Granger-causality and forecast variance decomposition analyses reveal that Australia is significantly linked with the US and the UK. Chan, Gup and Pan (1992) studied cointegration among Hong Kong, South Korea, Taiwan, and Singapore using both daily and weekly data from February 1983 to May They found that these Asian markets are not cointegrated with the US market. Chowdhury (1994) examines the interdependencies among the stock markets in Hong Kong, South Korea, Taiwan, Singapore, Japan, and the U.S using daily data from the period January 1986 through December He finds significant links between Hong Kong and Singapore, and between Japan and the U.S. South Korea and Taiwan, however, are not influenced by innovations from foreign markets because of their tight restrictions on foreign investment in local markets. He also concludes that the U.S. market has a strong influence on the Asian Four Little Dragons but it is not influenced by these Asian markets. Hung and Cheung (1995) investigate market integration in Hong Kong, Malaysia, South Korea, Singapore, and Taiwan using weekly data from January 1981 through December 1991and found no evidence of cointegration among these Asian markets. Corhay, Rad and Urbain (1995) provide another integration study focusing on five Pacific-Basin markets, including Australia, Hong Kong, Japan, Singapore, and New Zealand. A common cointegrating vector is found among the markets but Singapore and New Zealand do not show up significantly in the vector. Corhay et al. argue that this result is because that these two markets have relatively less financial importance in comparison with the other three markets. Another interesting finding is that HongKong, Japan, and Singapore have close ties and so have Australia and New Zealand, implying that there is a separation between the Far Eastern markets and the South Pacific markets even though collectively they are cointegrated. A study by Ghosh, Saidi and Johnson (1999) attempts to investigate whether or not the U.S. or Japan moves the Asian- Pacific markets. Their findings indicate that Hong Kong, India, Malaysia, and South Korea are closely linked with the U.S. market while Indonesia, Philippines, and Singapore have stronger ties with Japan. This result can be explained by the strong economic relationships between Hong Kong, India, Malaysia, and South Korea, and the strong business ties between Indonesia, Philippines, and Singapore. Johnson and Soenen (2002) examine the return co-movements for 12 Asian stock market using measures of feedback developed by Geweke (1982). They find that markets in Australia, China, Hong Kong, Malaysia, New Zealand, and Singapore are highly

7 Stock Market Integration: Evidence from India and Other Major World integrated with the Japanese market between 1988 and There is also evidence that the degree of integration among these Asian markets is increasing over time. Darrat and Zhong (2002) use trivariate models to test cointegration between 11 Asian-Pacific, Japanese, and the U.S. markets. Results indicate that each of those 11 Asian-Pacific markets, including Hong Kong and Taiwan, is cointegrated with Japan and the U.S. during 1987 and They also conclude that the U.S. market is the main driving force for the equilibrium relationships between the markets. Masih and Masih (1997) examine the dynamic linkages between the Asian Four Little Dragons and four developed markets, Germany, Japan, UK, and the U.S. Cointegration is found between the developed markets and the Asian Dragons. They also show that significant linkages run from South Korea to Taiwan, from Taiwan to Singapore, and from Singapore to South Korea and these three markets form a linkage chain. Lamba, A. (2005) studied the dynamic relationships between the South Asian markets of India, Pakistan and Sri Lanka and the major developed markets of US, UK and Japan during July February Using a multivariate cointegration and vector error-correction model, he found that the Indian market is influenced by the large developed equity markets including the US, UK and Japan and that this influence has strengthened during the more recent time period of January February In addition, he did not find that the Indian market exerts any significant influence on the Pakistani and Sri Lankan markets. Janakiramanan and Lamba (1998), by considering data on daily market indices, studied the linkages between the stock markets of Indonesia, Malaysia and Thailand, Australia, Hong-Kong, Japan, New Zealand, Singapore, US during the period They found that the US market influenced all other Australian markets, except Indonesia, and none of these markets exert a significant influence on the US market. By excluding US market for the VAR system, they found persistent linkages between the markets considered. They also found significant interrelationship among markets those are geographically and economically close and/or have large numbers of cross-border listings. Nath and Verma (2003) examined daily stock market indices of India, Singapore and Taiwan during the period 1994 to By employing bi-variate and multivariate cointegration analysis they did not found any long-term equilibrium relationships among those stock markets, though they confirmed the possibilities, in few cases, of some casual influences of one stock market return on the return in other stock markets. With a view to analyze the linkages among national stock markets of Asian Pacific countries, Sheng and Tu (2000) have tried to examine the equity prices of Taiwan, Malaysia, Thailand, South Korea, the Philippines, Indonesia, China, the US, Australia, Singapore, Japan and Hong-Kong for the period from July 1, 1996 to June 30, Their findings also asserted that the relationship in the South-East Asian countries were stronger than that in North-East Asian countries. Their Granger causality tests also suggested the presence of dominant role played by the US market. Bose, S. (2005) examined the interlinkage between the Indian stock market and the stock markets in Asia and the US using daily data from 1st January 1999 to 30th June She found that post-asian crisis and up to mid-2004, the Indian

8 612 Pradeep Kumar Panda & Debashis Acharya stock market did not function in relative isolation from the rest of Asia and the US as stock returns in India were highly correlated with returns in major Asian markets and was led by returns in the US, Japan, as well as other Asian markets. On the other hand, the Indian BSE Sensex return was also seen to exert some influence on stock returns in some important Asian markets. The literature review above clearly shows that there is conflicting evidence on the issue of international stock market linkages, depending on the methodology, data, time period and framework used. Unfortunately, little empirical evidence exists concerning linkages between Indian stock market and other markets of the world. India has much less exposure in the stock market integration literature until recently. Given India s fast-growing economic influence, research on the Indian stock market still seems to be inadequate and needs further investigation. The present study extends the existing stock market integration literature in the following ways. First, to provide further evidence, we examine the dynamic price linkages and interdependence between the stock market of India and that of the U.S., U.K., Japan, Singapore, Honk Kong, Malaysia, South Korea, Taiwan, and China using daily stock price indices data covering the period January 2, 2001 to November 28, Second, this research examines examine the long-term and short-term dynamic relationship among the stock prices using Johansen-Juselius cointegration and vector error correction model (VECM) method. Additionally, the innovation accounting analysis is conducted to further investigate the interactions between the Indian markets and others world markets. And lastly, the results from this research provide implications regarding international diversification and market efficiency that are important for investors and fund managers who are interested in investing in these markets. III. DATA DESCRIPTION AND PRELIMINARY ANALYSIS This study uses daily closing values for the stock indices of the markets in the India, United States, United Kingdom, Japan, Singapore, Hong Kong, Korea, Malaysia, Taiwan, and China for the sample period January 1, 2001 to November 28, The ten indices are: (1) Bombay BSE Sensex, (2) New York S&P 500, (3) London FTSE 100, (4) Tokyo Nikkei 225, (5) Singapore Strait Time Index, (6) Hong Kong Heng Seng Index, (7) Korea SE Composite, (8) Kuala Lumpur Composite (9) Taiwan SE Weighted, (10) Shanghai SE Composite. All the relevant data obtained from Yahoo Finance are denominated in their respective local currency units and adjusted for dividends and splits. To address the impact of the global financial crisis (2008) on Indian stock market integration, the sample period is further divided into two sub-periods: January 1, 2001 to December 31, 2007 and January 1, 2008 to November 28, We have used the data on which all the ten stock markets were open for trading, and remove the data for the days in which trading have not occurred at least in one market. Thus data are collected on the same dates across the stock exchanges and there are 2200 observations for each indices series. Our choice of country s stock markets is guided by the

9 Stock Market Integration: Evidence from India and Other Major World consideration that India has significant trade and financial relations with these countries. The daily continuously compounded returns are calculated by taking the first difference of the natural logarithms of the daily closing index values i.e. where is the stock index price on day t for stock market j and is stock index price on day t 1 for stock market j. IV. EMPIRICAL RESULTS AND FINDING In our study of financial interdependence i.e. the study of interdependence of different stock markets and hence studying the long-term interdependence of stock markets with Indian stock market involved tests of Cointegration. In the study of Cointegration, we checked for the long run stable relationship among different non-stationary variables. In simple terms it means, even if themselves nonstationary, there is a specific combination of variables which follow mean reversion. Figure 1: Time Series Plot of Daily Closing Prices of Stock Market Indices (January November 2008) The association between trends in Indian and other stock markets over various phases of ups and downs is quite apparent from the graphical exposition which depicts the movements of different market indices during the period 2nd January 2001 to 28 th November Our study took into consideration leading stock markets of different countries. Though geographically segregated, the financial markets of those countries were expected to have impact on Indian market mainly through different psychological forces like speculation. A fall in NASDAQ is generally followed by a fall in BSE index without any apparent cause.

10 614 Pradeep Kumar Panda & Debashis Acharya Table 1 Summary Statistics of Daily Closing Prices of Stock Market Indices Mean Variance Skewness Kurtosis J-B IND US UK JAP SNG HNK TAW SKR MLY CHN IND, US, UK, JAP, SNG, HNK, TAW, SKR, MLY and CHN, respectively, represent the stock returns of India, US, UK, Japan, Singapore, Hong Kong, South Korea, Malaysia, Taiwan, and China. This is corroborated by the correlation coefficients that are estimated to formally measure the extent of short-term association between the stock returns in different countries [Table 2]. Panel A illustrates linkages during pre- Global Financial Crisis period and Panel B depicts post- Global Financial Crisis period. The result brings forth the fact that within the sample period the returns in the Indian market have the highest association with other Asian market returns. The Indian market can be said to have the closest short-term linkages with Hong Kong, Singapore and Korea; incidentally, these are the three markets with the closest links with the US. Table 2 Cross Correlation Matrix for Daily Closing Prices of Stock Market Indices IND US UK JAP SNG HNK TAW SKR MLY CHN Panel A: Jan 2001-Dec 2007 IND 1 US.85 1 UK JAP SNG HNK TAW SKR MLY CHN

11 Stock Market Integration: Evidence from India and Other Major World Panel B: Jan Nov 2008 IND US UK JAP SNG HNK TAW SKR MLY CHN IND 1 US.92 1 UK JAP SNG HNK TAW SKR l MLY CHN In our study, we took historical prices of different indices for the period We first tested for non-stationarity of the stock prices. As expected, for all the series of indices, non-stationarity was confirmed by ADF and PP test. The nonstationarity was of first order for all of them since, ADF and PP tests for first difference rejected the presence of unit root for all of them. Table 3 Unit Root Tests: (Jan 2001-Nov 2008) Level First Differences ADF PP ADF PP IND * -38.4* US * -40.8* UK * * JAP * * SNG * -39.6* HNK * -40.3* TAW * -37.6* SKR * * MLY * * CHN * * * denotes no unit root in the series. The MacKinnon critical values for ADF and PP test are , , with intercept and trend at 1 %, 5%, and 10 % significance level respectively. In econometric analysis if two or more stock market price indices are found to be cointegrated, it implies that there is a long-run equilibrium relationship between them or that they will move very closely together over time. We then undertook the tests of Cointegration. We considered both Johansen s trace test and maximum eigen value test.

12 616 Pradeep Kumar Panda & Debashis Acharya Table 4 Outcomes of Tests for Johansen- Juselius Bivariate Cointegration for India with other Markets Panel A: IND and US r = 0 r > 0 31**(.0089) 29.82**(.0134) r 1 r > (.8546) 4.29 (.7809) λ Maximal Eigenvalue Test r = 0 r = (18.17) (18.17) r = 1 r = (3.74) 2.99 (3.74) ** denotes statistical significance at 5% level. r indicates number of cointegrating vectors. Linear Deterministic trend with intercept and trend in CE assumption is assumed Panel B: IND and UK r = 0 r > (.1684) 27.51**(.0288) r 1 r > (.4938) 5.49 (.5373) λ Maximal Eigenvalue Test r = 0 r = (18.17) (18.17) r = 1 r = (3.74) 5.43 (3.74) Panel C: IND and JAP r = 0 r > (.5416) (.4299) r 1 r > (.6239) 2.99 (.8688) λ Maximal Eigenvalue Test r = 0 r = (18.17) 13.9 (18.17) r = 1 r = Panel D: IND and SNG r = 0 r > (.6179) 19 (.2868) r 1 r > (.7305) 3.69 (.7821) λ Maximal Eigenvalue Test r = 0 r = (18.17) (18.17) r = 1 r = 2 - -

13 Stock Market Integration: Evidence from India and Other Major World Panel E: IND and HNK r = 0 r > (.1205) (.5104) r 1 r > (.6889) 4.4 (.6862) λ Maximal Eigenvalue Test r = 0 r = (18.17) (18.17) r = 1 r = (3.74) - Panel F: IND and SKR r = 0 r > (.7486) (.5965) r 1 r > (.8323) 2.99 (.8662) λ Maximal Eigenvalue Test r = 0 r = (18.17) (18.17) r = 1 r = Panel G: IND and MLY r = 0 r > (.8676) 21.3 (.1693) r 1 r > (.8615) 5.81 (.4952) λ Maximal Eigenvalue Test r = 0 r = (18.17) (18.17) r = 1 r = Panel H: IND and TAW r = 0 r > (.4796) (.2648) r 1 r > (.7276) 7.29 (.3242) λ Maximal Eigenvalue Test r = 0 r = (18.17) (18.17) r = 1 r = 2 - -

14 618 Pradeep Kumar Panda & Debashis Acharya Panel I: IND and CHN r = 0 r > (.9788) 26.09**(.0448) r 1 r > λ Maximal Eigenvalue Test r = 0 r = (18.17) (18.17) r = 1 r = (3.74) In the Johansen- Juselius bivariate cointegration, for US stock market, we got a conitegrating vector indicating a long run relationship between Indian and US stock markets. During pre- crisis period there found to be a cointegrating relationship between Indian and Hong Kong stock market which breaks after the occurrence of crisis. In case China, a cointegrating relationship is found after Crisis. For other stock markets the existence of any cointegrating relationship was rejected for the given level of significance. Table 5 Outcomes of Tests for Johansen-Juselius Multivariate Cointegration between Markets Panel A : IND, US and UK r = 0 r > **(.0059) 56.7** (.0009) r 1 r > ** (.0805) 25.7** (.0505) r 2 r > (.3833) 4.23 (.7102) λ Maximal Eigenvalue Test r = 0 r = (34.55) (34.55) r = 1 r = (18.17) (18.17) r = 2 r = (3.74) 2.25 (3.74) Panel B : IND, JAP, SNG, HNK, SKR, MLY, TAW, and CHN r = 0 r > ** (.0490) (.2282) r 1 r > (.2357) (,6615) r 2 r > (.2677) (.7655) r 3 r > (.2574) (.8233) r 4 r > (.2772) 43.72(.7054) contd. table

15 Stock Market Integration: Evidence from India and Other Major World r 5 r > (.3749) (.6844) r 6 r > (.6931) (.5676) r 6 r > (.6209) 5.47 (.5396) r 7 r > (.3833) 2.25 (.7102) λ Maximal Eigenvalue Test r = 0 r = (170.8) (170.8) r = 1 r = (136.61) - r = 2 r = (104.94) - r = 3 r = r = 4 r = r = 5 r = r = 6 r = r = 7 r = Panel C: IND, US, UK, JAP SNG, HNK, SKR, MLY, TAW, and CHN r = 0 r > **(.0000) **(.0035) r 1 r > **(.0049) **(.0454) r 2 r > (.1147) (.2735) r 3 r > (.4705) 94.01(.5798) r 4 r > (.4950) 66.95(.6277) r 5 r > (.4519) (.6790) r 6 r > (.4558) 28.79(.5798) r 7 r > (.6249) 26.82(.6937) r 8 r > (.6092) 14.16(.6497) r 9 r > (.5053) 5.32(.5592) λ Maximal Eigenvalue Test r = 0 r = (250.84) (250.84) r = 1 r = (208.97) (208.97) r = 2 r = (170.80) - r = 3 r = (136.61) - r = 4 r = (104.94) - Similar results also did hold from Johansen- Juselius multivariate cointegration test results. Thus, the tests established a long run stable relationship between Indian and US financial markets.

16 620 Pradeep Kumar Panda & Debashis Acharya Table 6 VECM Representation Lagged endogenous term US UK JAP SNG CHN MAL SKR TAW HNK IND t values Vector Error Correction Model also denotes significant feedback mechanism between Indian stock market and US stock market. VECM coefficients for other markets are not significant. V. CONCLUDING REMARKS This study looks at the integration of the Indian stock market with some major Asian markets and the US stock market over a period when much of the Indian market movements are perceived to be induced by FIIs, who continually move funds across global markets in search of the best possible returns. From the above exercise, we can conclude that, Indian market is having a cointegrating relationship with US financial market. During pre crisis period there found to be a cointegrating relationship between Indian and Hong Kong stock market which breaks after the occurrence of crisis. In case China, a cointegrating relationship is found after Crisis. But relationship with other financial markets is not well established. As for India s role in the integration of stock markets, there is significant evidence that India has played a unique role in the integration of major Asian markets in recent times. The degree of integration found between different markets in the Asian region is, however, not of a very high order and shows that the nature of comovements does not pose an immediate threat for capital outflows in case of a regional crisis. This is so because the lack of evidence on perfect integration implies that the Indian market is not seen to be trending in an exactly similar manner with rest of Asian markets and country fundamentals have an important role to play in stock market behaviour. Further improvement of trading and legal infrastructure in the stock market could help to divert more FII funds into the country and ensure the sustainability of such inflows. References Arshanapalli, B., Doukas, J. (1993), International Stock Market Linkages: Evidence from the Pre- and Post-October 1987 period, Journal of Banking and Finance, Vol. 17, pp Bose, S. (2005), Indian, US and Asian Stock Markets Recent Trends in Interlink Ages, ICRA Bulletin, Vol. 2, pp Chan K. C., Gup B. and Pan M. (1992), An Empirical Analysis of Stock Prices in Major Asian Markets and the United States, Financial Review,Vol. 27, pp Corhay, A., A. T. Rad, and J. Urbain (1995), Long Run Behavior of Pacific-Basin Stock Prices. Applied Financial Economics, Vol. 5, pp Choudhury, T. (1997), Stochastic Trends in Stock Prices: Evidence from Latin American Markets, Journal of Macroeconomics, Vol. 19, pp

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