International Journal of Economic Perspectives (ISSN:1307-1637)

International Journal of Economic Perspectives, 2014, Volume 8, Issue 4.

Stock Market Interlinkages among the Two Largest Emerging Economies of Asia – The Case of India and China

A.Senthil KUMAR*

KCT Business School, Kumaraguru College of Technology, Coimbatore – 641 049, Tamilnadu, India. Email: profask@kctbs.ac.in

V. SRIVIDYA

PSG Institute of Management, PSG College of Technology, Coimbatore, Tamilnadu, India. Email: srividya@psgim.ac.in.

ABSTRACT

This paper documents the Stock Market Inter-linkages / Co-integration, Causality and Innovations Accounting for the two largest emerging economies of Asia, viz., India and China. The 10-year month-end closing logarithmic returns of BSE Sensex and Shanghai Composite Index for the period 2005-2014 have been used. Statistical and Financial Econometric Tools like Pearson’s Correlation is used to study the co-movements, Autocorrelation for verifying the long memory effect, ADF Test and PP Tests for checking the stationarity, Johansen’s Co-integration Test for long-run linkages/cointegration, VAR model to study the short-run inter-linkages, Granger Causality Test for explaining the Causality, VECM for error correction of VAR model, VDA to account for variations, and IRF to account for the innovations and shocks. The paper states that Indian and Chinese stock markets are interlinked/cointegrated in the longrun. In the short-run, Chinese stock market is interlinked in single lagged interval with the Indian stock market. Chinese stock markets largely explain the variations of its own and a part of the variations in Indian stock market. The Indian stock market is more responsive to the Chinese stock market, while the India-induced innovations and shocks wade off quickly in the Chinese stock market. The paper concludes that there exists a unidirectional interlinkage and not dynamic interlinkage between the Indian and Chinese stock markets.

 JEL Classification: C13; C18; C22; F21; F36; G10; M00.

 Keywords: Stock Market Linkages; Cointegration; Causality; BRIC; Econometrics.

 *Corresponding author.

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