US subprime crisis, contagion and inter-linkages between indian stock market and stock markets of China and USA: An empirical analysis

In this paper, we examined the inter-linkages and long run integration of Indian stock market with stock markets of China and USA by using standard indices of MSCI over the period January 1, 2000 to March 31, 2016. We also investigated Indian stock market response to US subprime crisis. We use Granger causality test, Johansen co-integration test and Impulse response analysis of Vector auto regression framework to test various hypotheses. There is contagion effect of US subprime crisis on Indian stock market. In both pre and post, we have not found the granger causality relationship among any stock markets. Further, there are co-integrating relationships have been found between Indian market & China and Indian market and USA market. Impulse response analysis revealed that sectors of Indian stock market seems to be effected from the shocks created in the US and Chinese stock market and such shocks persist in Indian stock market for 4-5 months in case US and for 6-7 months in case of China. These results have important policy implications. The recovery and stability in there two economies are vital for stability and growth of Indian stock market.