Interrelationship between Indian and us Stock Markets

This study examines the nature and extent of linkage between the US and the Indian stock markets. The study uses the theory of cointegration to study interdependence between the Bombay stock exchange (BSE), and the NYSE and Nasdaq. The sample data consisted of daily closing prices for the three indices from January 1991 through December 1999 with 2338 observations. The results are in support of the intuitive hypothesis that the Indian stock market was not interrelated to the US markets for the entire sample period. It should be noted that stock markets of many countries became increasingly interdependent with the US stock markets during the same time period. India was late in effecting liberalization policies and when it implanted these policies it did so in a careful and slow manner. However, as the effects of economic liberalizations started to take place, the BSE became more integrated with the Nasdaq and the NYSE, particularly after 1998. It must be noted that though BSE stock market is integrated with the US stock markets, it does not influence the Nasdaq and NYSE markets. This result is to be expected, given the relatively small valuation of the BSE.