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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)

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

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References listed on IDEAS
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  2. Wong, Wing-Keung & Bian, Guorui, 2005. "Estimating parameters in autoregressive models with asymmetric innovations," Statistics & Probability Letters, Elsevier, vol. 71(1), pages 61-70, January. [Downloadable!] (restricted)
    Other versions:
  3. Wing-Keung Wong & Meher Manzur & Boon-Kiat Chew, 2003. "How rewarding is technical analysis? Evidence from Singapore stock market," Applied Financial Economics, Taylor and Francis Journals, vol. 13(7), pages 543-551, January. [Downloadable!] (restricted)
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  4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
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  6. Koop, Gary, 1994. "An objective Bayesian analysis of common stochastic trends in international stock prices and exchange rates," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 343-364, July. [Downloadable!] (restricted)
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  22. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bank for International Settlements and Bank Negara Malaysia, 2008. "Regional financial integration in Asia: present and future," BIS Papers, Bank for International Settlements, number 42, 11. [Downloadable!]
  2. 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. [Downloadable!]
  3. 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). [Downloadable!] (restricted)
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