Interdependence And Volatility Spillovers Under Market Reforms: The Case Of National Stock Exchange

Abstract

India, one of the emerging markets in Asia initiated the financial sector reforms by introducing international practices in its financial market.  In this paper an attempt has been made to examine whether and to what extent, Indian stock market is integrated with stock markets in the United States, Japan and U.K before and after the structural changes. It also examines whether such a relationship, if it exists, is affected by the structural changes that began in 1998  using daily data for the period April 1998 to December 2008. The main findings are: No evidence of long run relationships was found between the stock prices of India and its major trading partners before and after the structural changes. Second, in terms of short – run movements of international stock market returns, bidirectional Granger causality exist between the stock returns of India and those of US and UK and Japan after the structural changes but unidirectional relationship exists between India and the UK before the structural changes period.  The estimates from causality – type models suggest that volatility spillovers from UK and Japan were non –existent prior to structural changes and volatility spillovers from US and Japan have become quite pronounced after the structural changes. The results identify the US and Japan markets as the main sources of volatility spillovers for the NSE.