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Long Run and Short Run Linkages between Stock Indices in Bombay Stock Exchange: A Structural Cointegration Approach

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  • Suresh K G
  • Aviral Kumar Tiwari

Abstract

We have analyzed the short term and long term linkages between the sectoral indexes of Bombay Stock Exchange in India by using the daily data on nine sectoral indexes for the period 23rd August 2004 to 31st June 2010. After confirming the same order of integration of the study variables from the unit root test incorporating endogenously determined structural breaks, structural cointegration test has been carried out followed by VECM , Impulse response functions and variance decomposition analysis. The cointegration analysis results indicate that most of the sectoral indexes in India are cointegrated with at least one of the other indexes indicating that the sectoral indexes posses’ useful information about the movements of other indexes. This is confirmed by the Impulse response function analysis also. The comovements between the sectoral indices indicate that the Bombay stock exchange is not weak form efficient and the possibility of sectoral portfolio diversification is limited.

Suggested Citation

  • Suresh K G & Aviral Kumar Tiwari, 2012. "Long Run and Short Run Linkages between Stock Indices in Bombay Stock Exchange: A Structural Cointegration Approach," Journal of Quantitative Economics, The Indian Econometric Society, vol. 10(1), pages 177-181, January.
    • Handle: RePEc:jqe:jqenew:v:10:y:2012:i:1:p:177-181
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    3. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
    4. Markku Lanne & Helmut Lütkepohl & Pentti Saikkonen, 2002. "Comparison of unit root tests for time series with level shifts," Journal of Time Series Analysis, Wiley Blackwell, vol. 23(6), pages 667-685, November.
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