Cointegration relationship and time varying co-movements among Indian and Asian developed stock markets

Abstract

This paper aims to explore links between the Indian stock market and three developed Asian markets (i.e. Hong Kong, Japan and Singapore). The index prices are non-stationary so we used cointegration methodologies in order to explore interdependencies. Johansen methodologies reject the hypothesis of long-run relationships among all stock markets, while the Gregory-Hansen test rejects the hypothesis of no cointegration with structural breaks. Our results suggest that in the longterm the benefits for investing in India are limited. We further estimated the time-varying conditional correlation relationships among these markets We find that correlations rise dramatically during periods of crisis, while they return to their initial levels after those periods.

Transmission of the Global Financial Crisis to the East Asian Equity Markets

“…However, our findings extends their results by showing that the contagion effect exists between the United State and Hong Kong and Singapore during the subprime crisis. In addition, our results are consistent with a study by Gupta and Guidi (2012) who find evidence of contagion effect from the United States to the equity market of India, as well as a study by Syllignakis and Kouretas (2011) who provide evidence of the transmission of the shock in the United States to the CEE stock returns during the 2007-2009 financial crises.…”

Integration of Financial Markets in Post Global Financial Crises and Implications for British Financial Sector: Analysis Based on A Panel VAR Model

“…The different impact of the same factor on different stock markets indicates the asymmetric response of the stock market to macroeconomic shocks. On similar grounds, a study by Gupta and Guidi (2012) on the links between the Indian stock market and developed Asian markets (Hong Kong, Japan and Singapore) found that there is a short-run relationship and absence of a strong long-run relationship among these markets. Moreover, in a recent endeavor, Nashier (2015) found elements of association between BRICS 3 and UK and US stock markets in the period from 2004-2013, although they did not look at any structural break in the relationship due to financial crises and looked at the association as a whole which might be different in the Post-GFC (2008) world.…”

Which market integration measure?

“…From a methodological point of view, the empirical literature has proposed different measurement frameworks relying on price-based indicators: Vector Auto-Regression (VAR) models (Khalid and Kawai, 2003;Elyasiani and Wanli, 2008;Jayasuriya, 2011), standard cross-country correlation (Watson, 1980;Meric and Meric, 1989;Goetzmann et al, 2005), cointegration and error-correction models (Laopodis, 2011;Gupta and Guidi, 2012), GARCH models (Kim et al, 2006;Carrieri et al, 2007;Wang and Moore, 2008;Egert and Kocenda, 2011), asset pricing models (Nellis, 1982;Mauro et al, 2002;de Jong and de Roon, 2005;Barr and Priestley, 2004;Abad et al, 2010;Volosovych, 2011;Donadelli and Paradiso, 2014), and common component approach (Carrieri et al, 2007;Pukthuanthong and Roll, 2009;Yu et al, 2010). VAR-based studies make use of impulse response analysis to investigate the effects of contagion and the degree of interdependence, whereas cointegration-based studies aim to assess the presence of a long-run equilibrium among cross-country financial variables, such as stock or bond prices.…”