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Investment and Portfolio Management

Research Paper
On
'Stock Market Interdependence during COVID-19 ’
Group No: 5
Section: ‘B’
Submitted by:-
Rashi Harbhajanka (181245)
Shivangi Bhargava (191250)
Tushar Soni (191259)
Harshita Jain (191324)
Kushal Gupta (191328)

Batch: MBA – FT (2019-2021)

Institute of Management, Nirma University
Date of submission: 15-09-2020
 Abstract
The major purpose of the study we conducted was to determine the impact of Covid-19 on the stock
markets of various major countries. Also we identified the impact of all other stock markets on the India
stock markets. For the purpose of research we studied India (SENSEX), USA (S&P 500), China
(Shanghai Composite), Japan (Tokyo Stock Exchange Reid Index), Indonesia (Jakarta Composite),
Australia (AXJO) and Honk Kong (Hang Seng). We have taken under consideration the close price of
these stocks from 10th August 2019 till 10th August, 2020. The sole purpose of selecting these dates was to
study the pre-Covid and during C9ovid situation of the stock market. We have applied various tools for
comparison which are analysis of Descriptive Statistics, Multi linear regression and Pearson Correlation
Co-efficient Analysis. After using these tools we concluded that the Chinese market has been more stable
with less volatility in the prices and the returns are also high as compared to the other nations. Also the
Indonesian stock market is worst performing seeing the average returns and volatility in the market.
Using the multi linear regression analysis we were able to conclude that the India stock market
(dependent variable) was 93.5% impacted by the stock prices of other countries used in the study
(independent variables) as the R square came out to be 0.935. In the Pearson Correlation Coefficient
comparison we were able to find that USA and China showed a positive high degree of correlation while
China showed least correlation with Japan and Australia. Also taking about India high correlation was
observed between selected stock indices of Indonesia and India and the least correlation was between
India and China. Thus, our study can successfully prove that the stock prices of all the countries have
been interdependent on each other during Covid-19 situation and same can be concluded for India as well.
 Section I.
Introduction
The first case of Covid-19 was reported by WHO on 31st December, 2019 in Wuhan, China. In mid-
January 2020, the virus started to spread to all other Chinese cities, as increase in movement of people to
their home towns in huge numbers to celebrate Chinese New Year this turned the outbreak into a national
crisis. Even the Government announced a complete travel ban but till then it was too late and the spread
of virus increased further. On January 30, 2020 WHO declared a global emergency due to rapid spread of
the virus and it was only the sixth time when such emergency was announced by WHO. The worst hit
countries due to covid-19 as on 11 September, 2020 are USA, India, Brazil, Russia, South Africa,
Mexico, Spain etc. Suddenly the stock markets also started showing the impact of Covid-19 on the Stock
indices of various countries. Furthermore, the stock indices of affected countries are compared with the
S&P 1200 Global Index. We find that COVID-19 had a negative and limited impact on the stock markets
of China and other Asian countries in the early stage of the epidemic. With the spill-over effect on
European and American countries, the indices underperformed after the epidemic, as opposed to the
comparison period, in the middle and late stages. COVID-19 has had a negative impact on the European
and USA stock markets, a condition that will intensify in the short term as the virus spreads. When the
China A-share market restarted on 3 February, the Shanghai Securities Composite Index declined by
nearly 8% in response. In India ever since COVID 19 strike, markets loom under fear as uncertainty
prevails. It has sent markets around the world crashing to levels not witnessed since the Global Financial
Crisis of 2008. Following the strong correlation with the trends and indices of the global market as BSE
Sensex and Nifty 50 fell by 38 per cent. Of the 13 times when Sensex lost 2.5 per cent or more in 2020,
seven came in the month of March. The total market cap lost a staggering 27.31% from the start of the
year. But after Covid-19 spread its legs in India further the stock market also started to recover and
currently the stock market is quite stable. In this report we have tried to find the interdependence of
China’s stock market on the stock market of other countries like India, USA, Japan, Indonesia, Honk
Kong and Australia. We have tried to study various literatures in order to know about the stock
interdependence in more detail and we also used various tools to identify the relation. The stock market
has reflected the sentiments this pandemic unleashed upon investors, foreign and domestic alike. Despite
the fact that it’s hard to predict the magnitude and impact of Coronavirus on the economy, but it is certain
that the markets will bounce back soon the crisis gets over. 
 Section II.
A Brief Literature Review
Sr. Markets
Period of Methodology
No Study Under Results Found
Study Used
. Study

International
The mechanisms of
stock market
interdependence between
interdependence:
Panel-data developed markets differ from
Are developing Asian 1996-
1 gravity that of developing markets.
markets the Countries 2010
model  There is a “pure” positive effect
same as
of common EMU membership on
developed
stock market interdependence.
markets?

Countries in Asia experienced

Japan, more negative abnormal returns
The COVID-19 Korea, as compared to other countries.
9
Outbreak and Singapore, Event study Stock market movements become
February
Affected the USA, and increasingly correlated.
2 2020 to
Countries Germany, Regression Investors fear sentiment is proved
16 April
Stock Markets Italy, model to be a complete mediator and
2020
Response and the UK transmission channel for the
etc. COVID-19 outbreak’s effect on
stock markets.

Stock markets of Asia are not

Discounted immune to the shocks originating
Honk
Trade, Financial cash flow in US although the effects of
Kong,
Flows And Jan 1, valuation shocks vary considerably across
Singapore,
Stock Market 1999 to model, markets.
3 South
Interdependence Dec 31, forecast error The co-movement of
Korea,
: Evidence From 2009 variance macroeconomic variables did not
Taiwan,
Asian Markets decomposition contribute to changes in the
USA
analysis influence of US stock market on
that of Asian NIEs.
 Co-
Indonesia, integration, This study reveal that there is
Malaysia, vector long-term integration between the
Interdependence the auto stock market of Pakistan and the
of the Stock Philippines, regression stock markets of China, India,
Markets, Singapore, 1990 to (VAR), Indonesia, Korea, Malaysia and
4
Before and Thailand, 2001 vector error Thailand.
During the and correction The extent of stock market co-
Economic Crisis Australia, models movement is dependent on the
Germany, (VECM), and extent of strong bilateral trade
and the US Granger relationships.
causality

A study on the
The co‐movement stability of the
co‐movement
January 1, stock markets between China and
and influencing China and
2015, Two‐way developed countries in Europe or
factors of stock other
5 and fixed effects the
markets between of G20
March 31, model United States is high, but
China and the members
2018 relatively low between China and
other G20
Asian countries.
members

This study reveal that there is

Pakistan long-term integration between the
Determinants of
China, Augmented stock market of Pakistan and the
Stock Market
India, Dickey and stock markets of China, India,
Co-Movements
Indonesia, 2001 to Fuller (ADF) Indonesia, Korea, Malaysia and
6 between
Korea, 2015 and Thailand.
Pakistan and
Malaysia Philips-Perron The extent of stock market co-
Asian Emerging
and (PP) tests movement is dependent on the
Economies
Thailand extent of strong bilateral trade
relationships.

An Empirical The relationship between

Study on the exchange rate and commodities
Interdependence market is positive whereas the
among relationship between exchange
Granger
Stock Market, rate and stock market is negative.
7  India 2005-14  Causality and
Commodities It was found that there is a causal
co-relation
Market and relationship between exchange
Foreign rate and stock market and
Exchange exchange market and
Market commodities market respectively.
 Bangladesh,
Interdependence Bhutan, Correlation
The Equity Markets of South Asia
Of South Asian India, Matrix, Unit
July, and Developed countries are not
& Development Maldives, root,
1999 to co integrated with each other.
8 Stock Markets Nepal, Co integration
June, However the equity market of US
And Their Pakistan, test and
2011 and India found correlated with
Impact On KSE Sri Lanka Granger
each other individually.
(Pakistan) and Causality
Afghanistan

The correlation analysis shows

that BSE remain somewhat
positively correlated with Hang
Co-Movement India, Honk
Johansen Co- Seng. The Granger Causality test
and Integration Kong, January 1,
integration indicates that the return of BSE is
Among Stock South 1998 to
9 test, depending on BVSP, FTSE-100
Markets : A Korea, January
The Granger & MXX only. Outcome of
Study of 14 USA, Japan 31, 2017
Causality Johansen Co-integration test
Countries etc.
indicates that there is a long run
relationship among selected stock
markets.

All the markets showed positive

average daily returns for the
selected period.
There is considerable volatility in
the correlations between the eight
The Study on India, Honk July 1, Graphical
stock markets over time.
Co-Movement Kong, 1997 to exposition,
10 We have observed that the eight
of Selected Brazil, UK, June 30, Correlation
stock markets are fragmented into
Stock Markets USA Russia 2008 analysis
two major components that is
American Region (DJIA,
NASDAQ, MXX and BVSP) and
second other emerging markets
(BSE, HANGSENG and RTS).
 Section III.
Methodology and Tests used in the Study
Data
The daily data that we collected for the analysis were drawn from the yahoo finance database for the
period starting from August 14, 2019 to August 07, 2020. The study covers 7 stock markets that are-:
Country Stock Market
China Shanghai Composite
India SENSEX
USA S&P 500
Japan Tokyo Stock Exchange Reid Index
Indonesia Jakarta Composite
Australia AXJO
Hong Kong Hang Seng

We tried to find and understand the effect of all other stock markets on India's stock market. We
computed Daily Index of the stock market using following formulae-

r p1
t =log ⁡
p t−1

Where rt is the return from the market index for day t, Pt and P(t-1) are adjusted closing value of market
index at time t and (t-1) respectively.

Objectives of Present Study

The following are the objectives of the study;

1) To quantify change in co-movement over time series.

2) To understand the significance and impact of the world’s major stock markets on Indian stock market.

3) To study the strength of linear association between two stock markets..

Section IV.
Results obtained from the Study
1. Analysis of the Descriptive
Date India China USA Japan Indonesi Hong Australi
 a Kong a
Daily Average Returns 0.02 0.10 0.07 -0.09 -0.10 -0.02 -0.05
Annual Average Returns 3.89 24.46 18.27 -22.68 -25.40 -4.06 -12.09
Daily Variance 4.74 2.25 5.79 5.51 3.00 2.53 4.31
1200.4 568.1
Yearly Variance 8 2 1481.39 1409.36 768.71 646.48 1104.43
Daily Standard Deviation 2.18 1.50 2.41 2.35 1.73 1.59 2.08
Yearly Standard Deviation 34.85 23.98 38.49 37.54 27.73 25.43 33.23

Median 0.10% 0.12% 0.22% 0.05% 0.05% 0.01% 0.19%

Daily Average Returns to SD
Ratio 0.01% 0.06% 0.03% -0.04% -0.06% -0.01% -0.02%
- -
Minimum -8.53% -8.04 12.77% 11.93% -6.81% -5.72% -10.20%
Maximum 11.57% 9.64% 8.97% 14.07% 9.70% 4.41% 7.67%
Kurtosis 7.81 12.88 8.52 12.31 7.28 1.50 5.89
Skewness 0.06% 0.27% -1.06% -0.32% 0.14% -0.26% -0.85%

For the period starting from August 14, 2019 to August 07, 2020, all the markets showed a combination
of positive as well as negative daily average returns where China showed the highest daily returns
followed by USA that showed 0.07% whereas Indonesia showed the lowest daily returns that is -0.10%
followed by Japan that is 0.09%. During the same period USA showed the highest median of 0.22%
which indicates that USA moves towards positive side of the average return. The highest volatility was
showed by USA that is 2.41% followed by Japan that showed 2.35% and the least was shown by China
that is 1.50% followed by Hong Kong at 1.59%. The comparison for the markets can also be on the basis
of Average Daily Return to SD Ratio. The ideal risk return craving is indicated by the highest Average
Daily Return to SD Ratio. In our case China showed highest ratio that is 0.06%, and then comes USA
with 0.03% while on the other hand lowest ratio was shown by Indonesia that is -0.06% then came Japan
with 0.04%. As kurtosis is also a statistical measure we tried to find out the degree to which the returns
are accumulated in the tails or on the peak of the frequency of the distribution. In our case China and
Japan have more outliers in their data sets as compared to other countries stock return.

2. Multiple Linear Regression Analysis

Dependent Variable: India (BSE SENSEX)
Independent Variables: China (Shanghai Composite), USA (S&P 500), Japan (Tokyo Stock Exchange),
Indonesia (Jakarta Composite), Hong Kong (HSI) and Australia (AXJO).
A value of R square (0.935) signifies that with change in 100 points of BSE SENSEX, 93.5% is due to
the impact of the independent variables used in the study. The rest 6.5% change is due to other unknown
factors. The major contributing variable is observed to be Tokyo Stock Exchange (Regression Co-
efficient – 6.66) and the least contributing variable is Hang Seng (Regression Co-efficient – 0.33). The p-
value of Shanghai Composite, S&P 500, Tokyo Stock Exchange, and Hang Seng has a value of less than
0.05, and this proves the significance of the data. The effect of Jakarta Composite and ASX on our
response variable is insignificant, pertaining to their p-values (>0.05). The F-statistic in our regression
model concludes that this model is the right fit for the chosen data, since it is greater than F value. Hence,
it is observed that there is a wide range of variation among the group variables.

3. Pearson Correlation Co-efficient Analysis

Pearson correlation coefficient is a measure of the strength of linear association between two variables.
After preparing a correlation matrix, it was found that the stock indices of USA and Australia showed
maximum correlation (0.68) – A positive high degree of correlation, which means that change in one
index, has a positive impact on the other to a high degree. China showed the least correlation with Japan
and Australia (0.29), which is in alignment with our findings. In accordance with our assessment of the
impact of independent variables on our response variable, high correlation was observed between selected
stock indices of Indonesia and India (0.64) and the least correlation was between India and China (0.36)
which means that with change in one point in the stock price index, the change in the other is in the same
direction but to a moderate to low level.

Section V.
 Conclusion
In the last year or so, the world economy has been quite unstable. Most of the stock markets have
remained stagnant or had bearish effects. In this paper, we have tried to study the impact of stock markets
of few of the world’s major countries on each other, and more importantly India, during this COVID
period. The daily data of seven stock markets, namely SENSEX, Shanghai Composite, S&P 500, Tokyo
Stock Exchange, Jakarta Composite, Hang Seng and AXJO has been collected from the date 14 th August,
2019 to 7th August, 2020 for this purpose. From the Descriptive Analysis, we have found that only India,
China and USA stock markets showed positive average daily returns for the selected period. The highest
volatility was observed in USA while it was lowest for China during the period. The daily average return
to standard deviation ratio is highest in China while being lowest for Indonesia.

A multiple linear regression equation was developed to understand the impact of other stock markets,
considered for the study, on the Indian stock market. The results showed that China, USA, Japan and
Hong Kong have significant impact on Indian stock market. The other two markets are insignificant, i.e.
Indonesia and Australia. Also, Japan was found to be the most contributing factor to the variation in
Indian stock market while Hong Kong was the lowest. Results obtained from the correlation analysis
reveal that all the market index pairs have a moderately positive correlation. The maximum correlation is
observed between USA and Australia (0.68) and the lowest correlation is between China and Japan
(0.29), and China and Australia (0.29). So this means that, from the point of view of Chinese investors,
Japan and Australia could turn out to be attractive portfolio diversification options.

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