Stock Market Integration: Analysis of Long and Short Run Dynamics between Indian Market and Global Markets

Abstract: Indian stock market has emerged as one of the leading markets in the world during the recent years. Research shows that stock markets across the globe are getting increasingly interlinked over the years. Though Indian market has been influenced by the US market for long, the nature of the influence has changed over the years. Similarly, the dynamics of relationship between the Indian market and other markets has also undergone significant changes, especially during the post 2008 crisis period. In this background, this study attempts to analyze the long run and short run dynamics of Indian market with 19 global markets. The global markets selected for the study represent four regions – North America, South America, Europe, and Asia Pacific. Data pertaining to a 20-year period is analyzed to examine the inter-relations of global markets with the Indian market. Econometric tools such as cointegration, Vector Autoregression (VAR) and DCC-GARCH models are applied to the data for empirical analysis. The major findings indicate the Indian market does not share long-run relationship with global markets. However, the Indian market is found to be sharing strong short run dynamic relationship with global markets. There is evidence for volatility spillover across markets as well. It is observed that the Indian market is emerging as the leading market in the Asia Pacific region. Key words: Stock Markets, Indian Market, Market Integration, Volatility Spillover, DCC-GARCH JEL Classification Number: G15, C32, F36, C58