the paper while Section II describes the methodology and the nature of data. InSection III the results are explained and conclusions are drawn.
Section ILiterature Survey
Researchers usually use Vector Auto Regression (VAR) model along withvariance decomposition and impulse response analysis to study the dynamiclinkages among the stock markets. Statistical analysis of VAR model is welldocumented among others by Lutkepohl (1991), Johansen (1995), etc., and Ng &Perron (1995) for univariate model. Impulse response shock, depending on theorder of the variables, is examined by Sims (1980) and generalization of impulseresponse is expanded by Lutkepohl & Poskitt (1996) and Lutkepohl & Saikkonen(1999 and 2000).The studies relating to the stock market integration in early 1960s point out lowinter-linkage of the capital markets. Agmon (1972) and Ripley (1973) establishsome kind of inter-linkage among the capital markets of developed countries.The reasons for such low inter-linkage could be due to existence of trade barriersand also lack of information transmission, which could have hindered the linkageamongst the markets. Despite paucity of data and unavailability of advancedstatistical tools, the studies do establish some kind of dynamic linkage among thestock markets. During 1980s and 1990s important breakthrough in statisticsenabled investigation of the dynamic relationship in a major and fruitful way. Withthe availability of cointegration tests, the researchers are able to test theinterdependency more accurately and conclusively. Meanwhile spate of globalization has increased and countries are lifting trade and other barriers for free flow of capital and goods. As a result the effect of economic impact in onecountry is felt in other countries as well. The capital markets are also affectedand they are no more insulated from the economic shock elsewhere in the world.The effects of stock market crash of October 1987 and the Asian financial crisisin 1997 are widely felt in the whole world. The researchers who follow the trendsfind interdependency on wide range of market. Eun and Shim (1989)investigating markets of Australia, Canada, France, Hong Kong , Germany,Japan, Switzerland, UK and US during the period 1980-85 find marketinterdependency. Koch and Koch (1991) also find market interdependencybetween developed markets both in Asia, Europe and the USA. Hassan andNaka (1996) using vector error correction model on Japan, Germany, UK and USmarkets document short-run and long-run interdependency during the period1984-91. Choudhry (1997) through cointegration test on Latin Americancountries, viz., Argentina, Brazil, Chile, Colombia, Mexico, Venezuela and alsoUSA, find that the markets are cointegrated during the period 1989-93. Similarly,Chen, Firth and Rui (2002) find that capital markets of countries in Latin America,