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Interdependence Of International Financial Market-- The Case Of India And U.S

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  • Pami Dua

    (Department of Economics, Delhi School of Economics, Delhi, India)

  • Divya Tuteja

    (Department of Economics, Delhi School of Economics, Delhi, India)

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Abstract

This paper examines the nexus between domestic and foreign financial markets viz. Indian and U.S. money markets, equity markets and the common market for currency. We estimate volatility, spillovers-both in returns and in volatility, and cross-correlations in a multivariate framework for the financial markets. We utilize weekly data from June, 2000 to September, 2011 to model the interactions among the markets using a VAR(1)–MGARCH2(1,1) BEKK framework. We formulate an alternative VAR(1)–MGARCH(1,1) EWMA model to examine the robustness of the findings. We also include policy rates viz. effective federal funds rate and reverse repo rate as well as an indicator for the prevalent global investment climate (Federal Reserve of St. Louis’ financial stress index) in the analysis. Domestic spillovers in returns exist from the Indian stock market to the currency market. International spillovers from returns on U.S. stock market to returns on Indian stock market are evident. Further, we find that the economy’s policy rate significantly impacts the money market rate. The results also indicate that changes in financial stress index influence U.S. money market rates and returns on both the stock markets. The study reveals that volatility in all the markets surges post the global financial crisis of 2008-09. Spillovers in volatility across the markets are found to be present due to both innovations effects as well as volatility persistence. In particular, findings for the lagged volatility persistence effects suggest existence of significant bi-directional spillovers across the two stock markets and the currency market. Further, we observe the conditional correlations across assets to be time-varying.

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Bibliographic Info

Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 223.

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Length: 40 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:cde:cdewps:223

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Keywords: Globalization; Volatility; Spillovers across financial markets; BEKK model;

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References

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Cited by:
  1. Paulo Sergio Ceretta & Alexandre Silva da Costa & Marcelo Brutti Righi & Fernanda Maria Müller, 2013. "A 10 min tick volatility analysis between the Ibovespa and the S&P500," Economics Bulletin, AccessEcon, vol. 33(3), pages 2169-2176.

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