Research Paper Volume 3 Issue 6 February 2016

International Journal of Informative & Futuristic Research ISSN: 2347-1697

A Study Of Cointegration Between Indian,
American And Chinese Stock Markets
Paper ID IJIFR/ V3/ E6/ 007 Page No. 1862-1866 Subject Area Finance
Keywords Cointegration, Sensex, S&P 500, S&P 300, Engle Granger Cointegration Test

Principal & Associate Professor

1st Dr. S. Nirmala Department of Business Administration,
PSGR Krishnammal College for women, Coimbatore
Research Scholar-PhD
2nd Deepthy. K Department of Business Administration,
PSGR Krishnammal College for women, Coimbatore

Abstract
Financial Markets in the current Scenario do not operate in a vacuum.
Globalisation has opened doors to other countries and any policy change
in one country affects another country in one way or the other. This
Paper attempts to analyze the cointegration between American Stock
Market, Indian Stock Market and Chinese Stock Market. Stock Market
Indices from NYSE (S&P 500), BSE (Sensex) and Shanghai Stock
Exchange(S&P 300) are used for the study. The extent of co integration is
analysed using Engle Granger cointegration test. Data is collected for the
time period 01/01/2006 to 31/12/2015.The study will be helpful to
understand the extent of interdependence these markets have with each
other.

1. INTRODUCTION
The S&P 500 is considered to be the leading indicator of U.S. equities and is meant to
reflect the risk/return characteristics of the large cap universe. The
S&P500 index is weighted by market value and its performance is thought to
be representative of the stock market as a whole. This index provides a snapshot of
the overall U.S. equity market; 70% of all U.S. equity is tracked by the S&P 500. The
index selects its companies based upon their market size, liquidity, and sector. S&P BSE
SENSEX, first compiled in 1986, was calculated on a 'Market Capitalization-Weighted'
methodology of 30 component stocks representing large, well-established and
financially sound companies across key sectors. The base year of S&P BSE SENSEX

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Published On: February 15, 2016 1862
 ISSN: 2347-1697
International Journal of Informative & Futuristic Research (IJIFR)
Volume - 3, Issue -6, February 2016
Continuous 30th Edition, Page No.:1862-1866

was taken as 1978-79. S&P BSE SENSEX today is widely reported in both domestic
and international markets through print as well as electronic media. It is scientifically
designed and is based on globally accepted construction and review methodology.
The S&P/CITIC 300 serves as a barometer for the China A-share market’s
performance. Index constituents are composed of 300 enterprises, with the largest float-
adjusted market capitalization and liquidity, drawn from the entire universe of listed A-
share companies in China. Index constituents are composed of the 50 largest blue chip
enterprises among the constituents of the S&P/CITIC 300 index. Stocks included in the
S&P/CITIC 100 and the S&P/CITIC 200 aggregate to form the S&P/CITIC 300. Stock
markets are one of the indicators of the overall economic growth of a country. If the
economy grows, it results in and implies that the companies have fared well and the
stock markets have risen. The stock markets are governed by the interaction of demand
and supply. More demand, higher prices; more supply, lower prices. US economy is the
largest economy in the world. Economies of many small and large nations (especially
China) depend to a large extent on exports to American markets. Hence any change in
US economy affects these economies.
Although Indian economy was mainly driven by domestic consumption, post
liberalization the share of Indian trade to global trade is growing at a rapid pace. A large
number of Indian companies are getting involved in exporting their products to global
markets, raising funds by listing on foreign stock exchanges (NYSE, London Stock
exchange and NASDAQ etc.). The percentage of revenue of Indian companies coming
from foreign markets is growing year on year. Therefore, share price movements of
these companies are likely to be affected by developments in world economy. Rapid
development in technology (especially in the last one decade) is another major driver of
linking the various markets across the world. Internet has enabled the investors to
virtually trade/invest in any developed market across the world. The cointegration test of
American Stock Market, Chinese Stock Market and Indian Stock Market thus assumes
significant importance as it helps the investors to know the extent to which these
markets are cointegrated.

2. RESEARCH METHODOLOGY
Weekly Stock Prices of Indian, American and Chinese Stock markets are chosen
for the study. The weekly stock index returns of S&P 500(NY Stock Exchange), Sensex
(Bombay Stock Exchange) and S&P 300 (Shanghai Stock Exchange) are obtained from
the website “https://in.finance.yahoo.com”. The analysis and interpretation is done for a
period of 01/01/2006 to 31/12/2015.

3. OBJECTIVE OF THE STUDY

i.) To find out the cointegration of American and Indian stock market
ii.) To find out the cointegration of American and Chinese stock market
iii.) To find the cointegration of Chinese and Indian stock market.

Dr. S. Nirmala, Deepthy. K:: A Study Of Cointegration Between

Indian, American And Chinese Stock Markets 1863
 ISSN: 2347-1697
International Journal of Informative & Futuristic Research (IJIFR)
Volume - 3, Issue -6, February 2016
Continuous 30th Edition, Page No.:1862-1866

4. EMPIRICAL ANALYSIS
An Augmented Dickey Fuller (ADF) test is carried out on the variables and is
found that all the variables are stationary at first level of difference. Engle Granger
cointegration test is used to analyse the cointegration between the variables. Two
variables are said to be cointegrated when the linear combinations of two variables is
stationary implying that there is a long term relationship existing between them.
H0= There is no linear dependence among Sensex and S&P500
H0=There is no linear dependence among S&P 300 and S&P 500
H0=There is no linear dependence among Sensex and S&P 300
Testing for cointegration involves testing the residuals from an Ordinary Least Square
regression for the time series (Sensex & S&P 500, S&P300 & S&P 500, Sensex & S&P
300) and residuals are obtained.
Yt = β0 + β1Xt + β2Zt + ϵ
Regress y on x and z. The residuals are obtained from the Ordinary least square and a
Augmented Dicky fuller unit root test is carried out to check for unit root. If a unit root
is not present the residuals are stationary and the variables are cointegrated. The results
of the unit root test, t-statistics has to be compared with specially calculated critical
values. If the estimated values exceed any of these critical values the null hypothesis that
there is no cointegration among the variables can be rejected.
The test of cointegration is applied to Sensex (BSE), S&P 500(NYSE) and S&P300
(SSE) index and the results are as follows:
Table 1: Engle Granger Cointegration between Sensex and S&P 500
Index p value Test 1% EG 5% EG 10% EG
Statistic CR Critical Critical Critical
DF Value Value Value
-3.9638 -3.4126 -3.1279
Sensex-S&P 0.3865 -2.38675 Do not Do not Do not
500 reject H0 Reject H0 Reject H0

 Interpretation:
The estimated t-values exceeds all of these critical values and p values for ADF
test conducted on the residuals of the OLS regression equation is 0.3865 which is greater
than 0.01,0.05 and 0.1, this means that unit root hypothesis is not rejected, which means
that the series are not cointegrated
Table 2: Engle granger cointegration test between S&P 300 and S& P 500
Index p value Test 1% EG 5% EG 10% EG
Statistic Critical Critical Critical
CR DF Value Value Value
-3.9638 -3.4126 -3.1279
S&P 300- 0.07687 -3.23884 Do not Do not Reject
S&P 500 Reject H0 reject H0 H0

Dr. S. Nirmala, Deepthy. K:: A Study Of Cointegration Between

Indian, American And Chinese Stock Markets 1864
 ISSN: 2347-1697
International Journal of Informative & Futuristic Research (IJIFR)
Volume - 3, Issue -6, February 2016
Continuous 30th Edition, Page No.:1862-1866

 Interpretation:
The estimated t- values exceeds the 1% and 5% critical values but the t-value is
less than the 10% critical value. The p value is 0.07687 which is greater than 0.01,0.05
but less than 0.1. Thus Null hypothesis is not rejected at 1% and 5% significance level,
but is rejected at 10% significance level.
Table 3: Engle Granger Cointegration test between S&P 300 and Sensex
Index p value Test 1% EG 5% EG 10% EG
Statistic Critical Critical Critical
CR DF Value Value Value
-3.9638 -3.4126 -3.1279
S&P 300- 0.478 -2.2196 Do not Do not Do not
Sensex Reject H0 reject H0 reject H0
 Interpretation:
The estimated t-values exceeds all of these critical values and p values for ADF
test conducted on the residuals of the OLS regression equation is 0.478 which is greater
than 0.01,0.05 and 0.1, this means that unit root hypothesis is not rejected, which means
that the series are not cointegrated

5. CONCLUSION
The cointegration of Indian stock market, American Stock market and Chinese
stock market has been studied using Engle granger cointegration test. The study is made
to find the extent to which these stock markets are cointegrated with each other. The
weekly closing values of S&P 500, Sensex and S&P 300 are taken into account. The
interdependence was examined for the period 01/01/2006 to 31/12/2015. The study
shows that there is no significant cointegration between US and Chinese stock market
with Indian Stock market. But Chinese stock market is having a cointegration with US
stock market at 10% significance level.

6. REFERENCES
[1] Subha.M.V, Thirupparkadal Nambi, A study on cointegration between Indian and American
stock markets, Journal of Contemporary Research in Management, January-March 2010,
[2] Robert A. Connolly, F. Albert Wang, Economic News and Stock Market Linkages-Evidence
from the U.S., U.K., and Japan,
[3] Walid M.A. Ahmed, Cointegration and dynamic linkages of international stock markets: an
emerging market perspective, Online at https://mpra.ub.uni-muenchen.de/26986/
[4] MPRA Paper No. 26986, posted 26. November 2010 04:09 UTC
[5] Heng Chen, Bento.J.Lobo, Links between Indian, US and Chinese markets,
www.fas.nus.edu.sg/ecs/pub/wp/wp0602.pdf
[6] https://in.finance.yahoo.com
[7] www.moneycontrol.com
[8] www.investing.com
[9] Komlavi Elubueni Assidenou, Cointegration of Major Stock Market Indices during the
2008 Global Financial Distress, International Journal of Economics and Finance, Vol. 3, No.
2; May 2011

Dr. S. Nirmala, Deepthy. K:: A Study Of Cointegration Between

Indian, American And Chinese Stock Markets 1865
 ISSN: 2347-1697
International Journal of Informative & Futuristic Research (IJIFR)
Volume - 3, Issue -6, February 2016
Continuous 30th Edition, Page No.:1862-1866
[10] http://articles.economictimes.indiatimes.com/2008-01-06/news/28662860_1_global-
markets-london-stock-stock-exchange
[11] http://www.economicshelp.org/blog/541/economics/relationship-between-stock-market-
and-economy/
[12] http://www.investorwords.com/4378/SP_500.html
[13] https://www.quora.com/How-will-the-Chinese-stock-markets-crash-affect-the-Indian-
stock-market-Which-sectors-would-be-most-hit
[14] https://guptasanyam.wordpress.com/2015/07/15/understanding-the-stock-market-crash-
of-china-2015-the-aftermath/
[15] https://guptasanyam.wordpress.com/2015/07/13/understanding-the-stock-market-crash-
of-china-2015/

Dr. S. Nirmala, Deepthy. K:: A Study Of Cointegration Between

Indian, American And Chinese Stock Markets 1866