Study of co movement and interdependence of Indian stock market with selected foreign stock markets Ranpura Darshan*, Assistant Professor, Patel Bhavesh K.**, Associate Professor and Head of the Department, Patel Nikunj***, Associate Professor * Sankalchand Patel College of Engineering, Sankalchand Vidyadham, Gandhinagar-Ambaji Link Road. ** Sankalchand Patel College of Engineering, Sankalchand Vidyadham, Gandhinagar-Ambaji Link Road. *** S.V. Institute of Management, S.V. Campus, Kadi. Online published on 14 December, 2011. Abstract Purpose The objective of this paper is to examine the short-run causal linkages among equity markets to better understand how shocks in one market are transmitted to other markets and also try to study co-movement of Indian stock markets index with developed as well as developing countries’ stock market indices. Data/Period and Methodology The data were collected from finance.yahoo.com. The data includes daily adjusted closing index prices of Indian Stock market (BSE Sensex) and 10 other major developed and emerging stock markets. We have taken sample period of daily data from July 1997 to Dec 2009. We have also divided the data in two sub-periods, Period-I is ranging From July 1997 to September 2003 and Period-II is ranging from October 2003 to December 2009. We have used logarithm transformed stock price indices to neutralize their returns. Statistical Tools Used Daily log return data are examined for co-movement and interdependence using descriptive statistics, correlation among the major indices, Unit Root Test/Stationary test, and Granger causality test. Findings The SENSEX has given highest Risk adjusted return for the whole period followed by BVSP, whereas Nikkei has given negative Risk adjusted return for the same period. It has been observed that SENSEX has highest correlation with BVSP (98%) among all the pairs. With the help of bi-variate granger causality test, it is revealed that SENSEX is affected by HANGSENG, STI, DJIA, FTSE and DAX. So we can interpret that SENSEX is interdependent on Developed countries stock markets except NIKKEI. We can also see that SENSEX causes SCI, BVSP NIKKEI, KOSPI and AORD. It means that these markets are interdependent on stock price movement in SENSEX. Research Limitations The data is very limited from 2003 to 2009. It is only focusing on 11 major stock markets. Practical Implications Knowing that diversification reduces unsystematic risk, this paper focuses on probable diversification option for the portfolio investors to diversify their risk. Top Keywords Co-movement, Interdependence, Bombay Stock Exchange (BSE), Rolling correlation test, Augmented Dickey-Fuller, Granger causality Test. Top |