Integration of Indian Stock Market with Major Regional Players and the United States

Abstract

This study re-examines the short run and long run dynamics between four regional stock markets of Asia (India, Malaysia, Japan and China) and United States using weekly data ranging from April, 1998 to March, 2013. The long-term relationships among the markets are analyzed using the Johansen co-integration approach and short-run dynamics are captured using vector error correction models. The study reveals that there is an evidence of co-integration among the markets which means that stock prices in the countries under study share a common trend. The results reveal that Indian stock market moves towards equilibrium following a shock, one time period later but the speed of adjustment is slow. As expected stock market of US is granger causing Indian stock market. The presence of financial integration among the stock indices under study indicates that diversification among these five stock markets leads to little benefit to international portfolio investors.