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Financial Integration for India Stock Market, a Fractional Cointegration Approach

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Author Info

  • Wing-Keung Wong

    (National University of Singapore)

  • Aman Agarwal

    (GGS Indraprastha University)

  • Jun Du

    (National University of Singapore)

Abstract

The Indian stock market is one of the earliest in Asia being in operation since 1875, but remained largely outside the global integration process until the late 1980s. A number of developing countries in concert with the International Finance Corporation and the World Bank took steps in the 1980s to establish and revitalize their stock markets as an effective way of mobilizing and allocation of finance. In line with the global trend, reform of the Indian stock market began with the establishment of Securities and Exchange Board of India in 1988. This paper empirically investigates the long-run equilibrium relationship and short-run dynamic linkage between the Indian stock market and the stock markets in major developed countries (United States, United Kingdom and Japan) after 1990 by examining the Granger causality relationship and the pairwise, multiple and fractional cointegrations between the Indian stock market and the stock markets from these three developed markets. We conclude that Indian stock market is integrated with mature markets and sensitive to the dynamics in these markets in a long run. In a short run, both US and Japan Granger causes the Indian stock market but not vice versa. In addition, we find that the Indian stock index and the mature stock indices form fractionally cointegrated relationship in the long run with a common fractional, nonstationary component and find that the Johansen method is the best reveal their cointegration relationship.

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Bibliographic Info

Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0501.

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Date of creation: 2005
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Handle: RePEc:nus:nusewp:wp0501

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Related research

Keywords: unit root test; cointegration; Error Correction Model; Vector Autoregression Model; Johansen Multivariate Cointegration; Fractional Cointegration;

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References

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Citations

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Cited by:
  1. Bank for International Settlements, 2008. "Integration of India's stock market with global and major regional markets," BIS Papers chapters, in: Bank for International Settlements (ed.), Regional financial integration in Asia: present and future, volume 42, pages 202-236 Bank for International Settlements.
  2. Seshaiah, S.V., 2006. "Indian Capital Market Integration with Select Developed and Developing Countries," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2).
  3. Paramita Mukherjee, 2011. "An exploration on volatility across India and some developed and emerging equity markets," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 18(2), pages 79-103, December.
  4. P., Srinivasan & M., Kalaivani, 2013. "Stock Market Linkages in Emerging Asia-Pacific Markets," MPRA Paper 45871, University Library of Munich, Germany.
  5. Bank for International Settlements & Hong Kong Institute for Monetary Research, 2008. "Regional financial integration in Asia: present and future," BIS Papers, Bank for International Settlements, number 42, May.
  6. Sanjeev K. Routray, 2006. "Two Kinds of Activism: Reflections on Citizenship in Globalising Delhi," Working Papers id:463, eSocialSciences.
  7. Durai, S. Raja Sethu & Bhaduri, Saumitra N., 2011. "Correlation dynamics in equity markets: evidence from India," Research in International Business and Finance, Elsevier, vol. 25(1), pages 64-74, January.
  8. Saha, Malayendu & Bhunia, Amalendu, 2012. "How far India has gone down the road towards financial integration with US since subprime crisis? An Econometric Analysis," MPRA Paper 38731, University Library of Munich, Germany.

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