Indian, US and Asian stock markets

It is found that post-Asian crisis and up to mid-2004, the Indian stock market did not function in relative isolation from the rest of Asia and the US. On the other hand, the Indian BSE Sensex return was also seen to exert some influence on stock returns in some important Asian markets.

This study examines the interlinkage between the Indian stock market and the stock markets in Asia and the US. The study examines if there are any common forces driving the long-run movement of the stock prices (/returns) in the countries concerned or whether each individual stock index (/return) is driven solely by its own fundamentals. It also analyses the informational leadership aspect of stock price movements or the lead-lag relationship between various international markets. It is found that post-Asian crisis and up to mid-2004, the Indian stock market did not function in relative isolation from the rest of Asia and the US as stock returns in India were highly correlated with returns in major Asian markets and was led by returns in the US, Japan, as well as other Asian markets. On the other hand, the Indian BSE Sensex return was also seen to exert some influence on stock returns in some important Asian markets. Despite existing restrictions on capital flows, the Indian market is also seen to belong to the group of Asian markets cointegrated within themselves and with the US market. The degree of integration found between the Indian and other markets in the Asian region is, however, not of a very high order, consequently leaving sufficient room for portfolio diversification and not posing any immediate threat for capital outflows in case of regional crisis.