ON THE CROSS-MARKET LINKAGES IN GLOBAL FINANCIAL MARKETS

• Published in: Economic and Social Development: Book of Proceedings pp. 575 - 583
• Main Authors: Chourasiya, Aditya, Kambli, Aditi, Satoskar, Krutarth, Bhaisare, Rajrishi
• Format: Conference Proceeding
• Language: English
• Published: Varazdin Varazdin Development and Entrepreneurship Agency (VADEA) 01.03.2018
• Subjects: Crosslinking; Dynamic models; Economic development; Economic models; Efficient markets; Eigenvalues; Equilibrium; Error correction; Error detection; Foreign exchange rates; Hypotheses; International finance; International trade; Investment; Linkages; Options trading; Profits; Random variables; Regression analysis; Risk management; Securities markets; Statistical analysis; Stock exchanges; Stock market indexes; Stock prices; System theory; Systems theory; Time series; Volatility; United States > US; China
• ISSN: 1849-6903; 1849-6903

We study the interrelationships among stock markets of developing economies from a system theory approach. Previous research in financial economics suggests that stock markets are interconnected and information travels from one market to another to the extent of the level of linkages between two (or more) markets. Efficient market hypothesis proposes that markets operate with different forms of informational efficiency and the informational shock in one market is reflected as shock(s) in other market(s) to the extent of their interlinkages. The informational shock in a market might take some time to reach and reflect in other market(s) thereby providing market players in the other market(s) to exploit this information to gain some abnormal profits.Such arbitrage opportunities arise out of informational inefficiency and weak interlinkages among financial markets and violate the efficient market hypothesis theory. If financial markets are believed to be functioning as a system, they should respond in a more rational and efficient ways to any new information and the shocks originating because of such information. In this paper, we study the cross-market linkages in the context of stock markets of the developing economies in a system dynamic framework.Using ten year weekly data from April 2007 to March 2017 for twelve stock indices from across the world, we explore the cross-linkages among markets. The studycomprises of data on NYSE, NASDAQ, SSE Composite, HANGSENG, S&P500, NIKKEI 225,DJIA, EURONEXT, NIFTY and SENSEX. In this piece of work, we begin with examining the association of SENSEX with other world indices. We also consider USD/INR exchange rate and India Volatility Index as exogenous variables to capture the interaction effects.We show the time-varying comovements between the Indian and other major international stock markets. Our results from cointegration tests incorporate structural breaks and recursive association-based dynamic models suggest the implications of the time-varying relationships among major stock markets. Statistically significant coefficients of recursive error correction terms connote that the long-term equilibrium between the Sensex and other major indices are achieved within very short period as opposed to what prior literature has suggested. We argue that this level of international cointegration among major stock markets of the world provides better risk management opportunities for investors holding global portfolio investment. And evidence of cointegration among major markets improves upon the issue of information asymmetry and facilitates more rational capital allocation.