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Empirical Analysis of the Causality between Indian and US Stock Markets’ Conditional Volatility: Further Evidence

Author

Listed:
  • Rakesh Kumar

    (University of Delhi, India)

  • Raj S Dhankar

    (University of Delhi, India)

Abstract

This paper attempts to investigate the dynamic relationship between the United States (US) and Indian stock markets through the conditional volatility of two stock markets during the 1995-2007 period, using monthly data of BSE-listed BSE 100 and NYSE-listed S&P 500 indices. The research methodology included testing of stationarity with Dickey Fuller test and the use of two-stage GARCH (1,1) model. In the first stage, conditional volatility of both stock markets was estimated, and then it was used as an exogenous variable to estimate further conditional volatility of both stock markets. The study also employed the linear regression model to test the relationship between conditional volatilities of two markets, and finally Granger causality test was used to ascertain the causal relationship between conditional volatilities of two stock markets. The study confirms the interdependency of the Indian stock market and the US stock market by the presence of a strong relationship between conditional volatilities of two markets. The study highlights the interdependency among the stock markets in question and facilitates investor diversification of funds. In fact, in the age of globalisation, integration of stock markets has become a matter of great importance for fund managers and investors as it facilitates to scale down portfolio risk through diversification of funds across the stock markets.

Suggested Citation

  • Rakesh Kumar & Raj S Dhankar, 2012. "Empirical Analysis of the Causality between Indian and US Stock Markets’ Conditional Volatility: Further Evidence," Capital Markets Review, Malaysian Finance Association, vol. 20(1&2), pages 65-76.
  • Handle: RePEc:mfa:journl:v:20:y:2012:i:1&2:p:65-76
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    Citations

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    Cited by:

    1. Rakesh Kumar, 2017. "Examining the Dynamic and Non-linear Linkages between Crude Oil Price and Indian Stock Market Volatility," Global Business Review, International Management Institute, vol. 18(2), pages 388-401, April.
    2. Rakesh Kumar, 2016. "Integration of Stock Returns and Volatility of Emerging Equity Markets," Review of Market Integration, India Development Foundation, vol. 8(1-2), pages 79-102, April.

    More about this item

    Keywords

    BSE 100; S&P 500; conditional volatility; GARCH; causality;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East

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