International Trade and Stock Market Integration: Evidence from Study of India and Its Major Trading Partners

Abstract

The objective of this article is to examine the integration among the stock markets of India and its major trading partners with respect to the 2008 global financial crisis. The study is conducted on India and its major trading partners: the United States, China, Germany, Switzerland, Russia, Hong Kong, Saudi Arabia, and the United Arab Emirates. This article uses daily returns covering a period of 18 years, from January 1, 2001 to December 31, 2018 (pre-crisis period from January 1, 2001 to December 31, 2008 and post-crisis period from January 1, 2009 to December 31, 2018). The study uses correlation, unit root test, Granger causality, the Johnsen cointegration test, and generalized method of moments (GMM) to evaluate the integration among the markets. The Granger causality test found short-term integration among the majority of the markets. The Johnsen cointegration test and GMM found long-term integration among the markets. It was interesting to find that after the financial crisis the stock markets became more integrated to an increase in international trade. The factor analysis revealed that before the financial crisis, the NASDAQ was closer to the Bombay Stock Exchange Index (BSE) as compared to the Shanghai Stock Exchange Composite Index (SSE). However, after the financial crisis, the SSE is closer to the BSE as compared to the NADAQ. The reason for such an outcome is the increase in trade with China after the financial crisis. The outcome of this study has implications for the government in framing international trade policy considering the other member countries. Investors can design their investment portfolio for the short run and long run by considering the changing degrees of financial risks of different securities. This article has practical implication for multinational corporations (MNCs) in policy decision making. This article is limited in that it addresses only eight major trading partners of India. TOPICS: Exchanges/markets/clearinghouses, developed markets, emerging markets, frontier markets, global markets Key Findings • Investors can design their investment portfolios by considering the risk-return dynamics with respect to trade and investment. • Investors can avoid certain countries, if there is a trade war between those countries. • MNCs can design their investment and diversification plans looking at the integration and trade across the markets.