Cointegration of East Asian, Indian and European markets: A study of the impact on Indian bourses

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 goals, the most important of which is to explore better returns in a short time by portfolio investors. During the mid-twentieth century, the spotlight of the study of co-movement between the markets was confined to the western markets. Very few studies focused on Asian equity market inter-linkages. The focus of research literature started shifting to Asia in the late 1990’s mainly on account of the South-East Asian crises in 1997-98. With Asia gaining prominence in the global economy, many studies have now started analyzing the inter-linkages among the Asian markets, and not just their cointegration with the United States or United Kingdom equity markets. Indian investors, both retailer and institutional, look 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 an impact on the Indian market during morning sessions, while they look West (European markets) in the afternoon, as these markets also have a short term impact on Indian bourses. This paper is an attempt to observe the short term and long term impact on Indian bourses, especially the 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 European indices viz FTSE 100 (England), Euronext 100 (Netherlands), CAC 40 (France), DAX (German), and the 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. The model developed in the study is found to be as robust as all the three – LM stat, JB statistic and VEC Residual Heteroskedasticity point to absences of heteroskedasticity in the residuals. This study helps both domestic and foreign investors to select strategies to achieve better returns.