Empirical Testing of Co-integration of International Financial Markets with Reference to India, the USA, Japan, and Hong Kong. (June 2022)

• Record Type: Journal Article
• Authors: Keshari, Aditya; Gautam, Amit
• Is Part Of: Jindal journal of business research. Volume 11:Number 1(2022)
• Page Start: 34
• Page End: 43
• Publication Date: 2022-06
• Subjects: International stock market -- co-integration analysis -- integration and segmentation of world market -- vector error correction model -- variance decomposition analysis -- impulse response function; Business -- Research -- Periodicals; 658.0072
• DOI: 10.1177/22786821221082923
• Languages: English
• ISSNs: 2278-6821

Abstract

This article examines the co-integration among the financial markets of four countries (India, the USA, Japan, and Hong Kong) from April 2010 to May 2021. Using the Johansen co-integration test, we establish the integration between the stock markets of these countries. The test clearly shows that there exists long-run co-integration between these countries. Furthermore, we checked the relationship of one country with another by applying the multivariate Granger causality test, which shows the influence of the US market over the other countries. The results significantly show the existence of long-run co-integration and linkages between these financial markets. Applying the Vector error correction model and variance decomposition analysis for the period confirms the result obtained from multivariate Granger causality. As the study shows, the stock market of the countries is not entirely inter-linked. However, some tests provide the pairwise linkages but not when talking about all the nations together. That means the rise in one stock market does not necessarily impact the surge in other stock exchanges, which means investors can profit from diversifying between these stock exchanges. It provides the opportunity for portfolio diversification to investors. The study shows that "the international stock market is neither fully integrated nor completely segmented, " giving international diversification an opportunity. As in our study, the "U.S. market is the most exogenous, " and the Japanese market is relatively isolated from the other market, where the impact from the different markets is not that significant.