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

Rakesh Kumar () and Raj S Dhankar ()
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Rakesh Kumar: University of Delhi, India
Raj S Dhankar: University of Delhi, India

Capital Markets Review, 2012, vol. 20, issue 1&2, 65-76

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.

Keywords: BSE 100; S&P 500; conditional volatility; GARCH; causality (search for similar items in EconPapers)
JEL-codes: C12 C23 C33 C51 N15 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:mfa:journl:v:20:y:2012:i:1&2:p:65-76

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