Assessing the Association of BSE Sensex with Selected World Stock İndices

Abstract

Increased global economic integration is believed to bear a key influence on the international stock market correlations. In recent years however, India has shown lesser sensitivity to global markets due to other influencing factors such as inherent strength / weakness of the economy, government policies, socio-political environment and domestic inflows. Low correlation is considered as a major determinant of portfolio flows as it provides an incentive for foreign institutional investors (FIIs) to diversify their risk across geographies and smooth out their portfolio returns. This research aims to identify long-term association, trends and patterns of the Indian stock market in relation to other world indices.

For the scope of this study, prices of the following nine world indices across a sample of developed and emerging economies were taken into account:  Dow Jones Industrial Average DJIA (United States), HangSeng Index HSI (Hong Kong), SSE Composite (China), KOSPI (South Korea), Nikkei225 (Japan), Moscow Exchange MOEX (Russia), IBOVESPA (Brazil), FTSE (United Kingdom) and BSE Sensex (India). Weekly prices from Dec 2013 to Dec 2019 were taken to dodge the noise in the prices. The research methodology relies on the concept of cointegration to explore which of these indices have a mutual long-run association during the given period. The results of the cointegration tests are checked for application of VAR or VECM framework if required to further estimate the multivariate time series. The study indicates that for the period under consideration, the given stock markets exhibit some cointegration. However, the degree of cointegration is found to be very weak. This shrinking cointegration presents diversification opportunities for international portfolio investors who may leverage high returns from certain emerging markets while balancing their risk with investments in more stable economies.