CO MOVEMENT OF

EME AND
DEVELOPED MARKET
INDICES
FINANCIAL MARKET | TERM-2

Deepu R Unnithan (21PGDM00B009)

Harsh Bachhil (21PGDM00B014)Prachi Mishra (21PGDM00B017)
Priyam Kumar(21PGDM00B019)
 CONTENTS

Executive Summary 2

Introduction 3

Stock Indices 5

Research Methodology 10

Data Analysis 11

Studying the Correlation Structure of Index returns 13

Conclusion 15

References and Data source 16

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 Executive Summary

The recent global financial (and economic) crisis has validated the need to assess the

financial sector of the economies with rather unconventional approaches. Believing that financial

markets use all the available information in an efficient manner is as questionable as finding

models which test the existence of bubbles in stock exchange markets. The objective of this

report is to examine the current Risk-return, current correlation structure amongst stock market

indices of various Developed and Emerging Countries. The markets included in this study are 6

in total, divided equally between emerging and developed markets. Emerging markets are India,

Taiwan, brazil. Developed markets are Germany, Japan, USA. The sensitivity of these

economies on LIBOR has also been examined in this report.

During preparation of this report, we examined numerous studies which demonstrates

that correlations among international markets tend to increase when stock returns fall

precariously.

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 Introduction

Integration of financial markets is a process of unifying markets and enabling

convergence of risk-adjusted returns on the assets of similar maturity across the markets. The

process of integration is facilitated by an unimpeded access of participants to various market

segments. Financial markets all over the world have witnessed growing integration within as

well as across boundaries, spurred by deregulation, globalization and advances in information

technology. As may be expected, financial markets tend to be better integrated in developed

countries. At the same time, deregulation in emerging market economies (EMEs) has led to

removal of restrictions on pricing of various financial assets, which is one of the pre-requisites

for market integration. (1)

While assessing the integration of financial markets, it may be useful to keep in view the

 Heterogeneity of markets,
 Dimensions of integration,
 Measurement issues
 Perceived benefits and risks of integration

Factors that attribute to Integration of global market are:

 Capital Mobility
 Portfolio Diversification
 Reliance of nations on the savings of other nations
 Leverage preference shift of companies from debt to equity finance

The globe is viewed as a solitary monetary unit in light of the fact that the cross-line

developments are normal. Monetary business sectors are no exemptions as the progression of

capital inside various pieces of the globe has been prompting the joining of worldwide business
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sectors. This review analyses the degree of reliance of created just as arising economies with the

assistance of relationship coefficients related with the co-development of their securities

exchanges on day by day, week by week and month to month returns. The effect of LIBOR - a

worldwide macroeconomic variable, on the stock lists has additionally been inspected. The

outcomes show that the relationship coefficients inside also among arising and created

economies have been viewed as high; demonstrating the degree of incorporation of worldwide

business sectors. Likewise, stock lists of created nations move more in accordance with LIBOR

in contrast with the arising economies. The mean returns also the instability is higher and effect

of LIBOR is lower in arising economies than created ones, making the arising economies to be

alluring objections for speculation.

The financial exchange crash of 2020 started on Monday, March 9, trailed by the biggest

point plunge for the Dow Jones Industrial Average (DJIA) to that date. Two more dread about

the Covid spread, which was expected to cause oil value drops and a downturn On March 11,

2020, the World Health Organization proclaimed the novel Covid a pandemic. To stop the spread

of the infection, numerous nations implemented asylum set up orders.As an outcome, most states

shut insignificant administrations. In only couple of months, the pandemic crushed the U.S.

economy. In the main quarter of 2020, development declined by 5%.In April, retail deals dove

16.4% as lead representatives constrained the conclusion of superfluous organizations. The

conclusion put many individuals jobless, lifting the quantity of jobless specialists to 23 million

unrivaled point drops followed it on March 12 and March 16 The accident was powered by

worldwide financial backer feelings of The pandemic's all out sway on the worldwide economy

will be being scrutinized for a long time to come. Ongoing projections show that worldwide

destitution is on target to fall back to 2017 levels after over 20 years of nonstop decrease.

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 STOCK INDICES

A stock market index, also known as stock index, is a statistical measure that reflects

changes taking place in the market. It’s created by grouping a few similar stocks among the

securities listed on the exchange and the selection criteria could be the size of a company, its

market capitalization or type of industry. Change in prices of underlying securities impacts the

overall value of the index. If prices rise, the index will rise, and if they go down, so will the

index. Stock indices are required to know the mood and sentiment prevailing in the market. As

an investor, you can identify the market’s pattern by looking at the indices, and use it to decide

which stock can prove to be a winning bet.

Apart from helping you to zero-in on the stock to invest, indices also act as the barometer

for peer comparison. If any stock has given higher returns than the index, it’s said to have

outperformed it. On the other hand, if it has given lower returns, it’s said to have

underperformed.  

 Stock indices also aid you in identifying trends of a particular sector and take investment

decisions accordingly. They also help you to make passive investment, i.e., investing in a

portfolio of securities that closely resembles the index. With passive investment, you can cut

down on the cost of research and selection process of equities.

The three most common index weighting models are:

 Market-Cap Weighted: In a market cap-weighted index, the index more heavily

represents stocks with higher market caps. With this structure, large companies have a

bigger impact on the index’s performance.

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  Equal Weighted: With an equal-weighted index, the index treats all components the

same. This means each company’s performance affects the index the same amount,

whether they’re incredibly large companies or incredibly small.

 Price Weighted: A price-weighted index grants each company a different weight based

on its current share price. Companies with larger share prices have more clout in these

indexes, regardless of how big or small the companies actually are.

The indices included in this report are selected on the basis of Emerging Market

Economies (EME) or developed countries. One stock price index has been chosen from one

economy for sample.

EMERGING COUNTRIES
INDIA SENSEX
BRAZIL IBrX 50
TAIWAN TWII
DEVELOPED COUNTRIES
USA Nasdaq-100
JAPAN NIKKEI – 225
GERMANY DAX

SENSEX

It is short for Sensitive Index. The term Sensex refers to the benchmark index of the BSE

in India. The Sensex is comprised of 30 of the largest and most actively traded stocks on the BSE

and provides a gauge of India's economy. It is float-adjusted and market capitalization-weighted.

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The Sensex is reviewed semiannually each year in June and December. Created in 1986, the

Sensex is the oldest stock index in India and is operated by Standard & Poor's (S&P). Analysts

and investors use it to observe the cycles of India's economy and the development and decline of

particular industries. (5)

IBrX 50

The IBrX 50 is designed to measure average stock performance tracking changes in the

prices of the 50 most actively traded and best representative stocks of the Brazilian stock market.
(6)
. The component stocks are weighted according to the outstanding shares’ market value. The

IBrx 50 will indicate the return on a portfolio constituting of securities, which are weighted

according to the respective market value of the type included in the portfolio.

TWII

The TAIEX, is the Taiwan Stock Exchange Capitalization Weighted Stock Index, also

known as TWII, or the Taiwan Weighted. An index tracking all common stocks that trade on the

Taiwan Stock Exchange. The index is weighted for market capitalization and uses the Taiwan

dollar as its currency. (7)

NASDAQ – 100

The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies

listed on the Nasdaq stock exchange. The index includes companies from various industries

except for the financial industry, like commercial and investment banks. These non-financial

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sectors include retail, biotechnology, industrial, technology, health care, and others. The index is

constructed on a modified capitalization methodology. This modified method uses individual

weights of included items according to their market capitalization. Weighting allows constraints

to limit the influence of the largest companies and balance the index with all members. To

accomplish this, Nasdaq reviews the composition of the index each quarter and adjust weightings

if the distribution requirements are not met. (8)

DAX

The DAX—also known as the Deutscher Aktien Index or the GER40—is a stock index

that represents 40 of the largest and most liquid German companies that trade on the Frankfurt

Exchange. The prices used to calculate the DAX Index come through Xetra, an electronic trading

system. A free-float methodology is used to calculate the index weightings along with a measure

of the average trading volume. The DAX was created in 1988 with a starting index level of 1,163

points. DAX member companies represent roughly 75% of the aggregate market capitalization

that trades on the Frankfurt Exchange. The DAX has two versions, called performance index and

price index, depending on whether dividends are counted. The performance index, which

measures total return, is the more commonly quoted, however the price index is more similar to

commonly quoted indexes in other countries. In this report we have taken price index. (9)

NIKKEI – 225

The Nikkei is short for Japan's Nikkei 225 Stock Average, the leading and most-

respected index of Japanese stocks. It is a price-weighted index composed of Japan's top 225

blue-chip companies traded on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow

Jones Industrial Average (DJIA) Index in the United States.). It is the oldest and the most well-

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known Asian index in the world. The Nikkei 225 index’s components are reviewed every year in

September. Any changes, if required, are published in October and the index is adapted

accordingly.

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 RESEARCH METHODOLOGY

The objectives of this study have been achieved by collecting data from the publically

available information sources of respective markets. The period for this study is between January

1, 2015 and December 31, 2021. This is span of time where we can observe the effect of pre

COVID, post COVID. In this we see a rise till the end of second decade of 21 st Century. After the

Covid hit this world, the graph was startled down.

For return analysis of stock indices, we took closing rate of individual country index from

Yahoo finance website on daily, weekly, monthly frequency.). In order to create a comparable

ratio for correlation study, country specific closing indices were converted into simple indices by

dividing them with their respective value on January 1, 2015.

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 DATA ANALYSIS

Calculation and Assessment of Risk-Return

Mean returns and their respective standard deviation of all the selected stock indices have

been calculated on daily, weekly and monthly basis.

Analysis of Daily Index Return

Table 1: Daily index Return

Country Mean return Standard Deviation Mean /

Standard Deviation
Emerging Category
INDIA (0.001353488) 0.009415554 (0.143750241)
TAIWAN (0.000092505) 0.007520137 (0.012301086)
BRAZIL 0.000543899 0.016696834 0.032574984
Developed category
USA 0.000367894 0.010007924 0.036760286
JAPAN (0.000058892) 0.00908773 (0.006480487)
GERMANY (0.000537832) 0.007892943 (0.06814086)

The highest return is in Brazil. On volatility front, emerging countries scored high with

Brazil and India but developed nations are not too behind. Risk- return is highest in USA.

Country Mean return Standard Deviation Mean /

Standard Deviation
Emerging Category
INDIA 0.008314545 0.050335749 0.165181707
TAIWAN 0.007864278 0.038562828 0.20393416
BRAZIL 0.011295916 0.068875144 0.164005702
Developed category

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 USA 0.012803806 0.049283774 0.259797586
JAPAN 0.006963788 0.048643462 0.143159797
GERMANY (0.001960766) 0.055539822 (0.035303789)
Table 2: Monthly Index Return

As shown in table 2, Mean return is highest for USA. Emerging nations are such as Brazil is

having highest volatility. Mean per standard deviation is highest for USA.

Because of Covid, developed nation were at better position to give mean return than

emerging nations. This indicates that developed nations are better in providing mean return while

at the time of global emergencies.

Volatility, represented by standard deviation, has been observed to be higher for those

countries which have higher mean return.

Studying the Correlation Structure of Index returns

• Any value of more than 0.5 will signify strong positive correlation i.e. changes in index

value of one market will lead to a similar change in another market. On the other hand,

value between 0 and 0.5 shows least positive correlation.

• Value of less than zero shows negative correlation i.e. when index value of one market

goes up, it brings reverse impact in the index value of another market.

• Value of zero signifies no correlation or association among markets

Table 3: Correlation among emerging Countries

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 BRAZI
Country INDIA TAIWAN
L
INDIA 1 0.89976 0.736066
TAIWAN 0.89976 1 0.804209
0.73606
BRAZIL
6 0.804209 1

As observed from the table, there is a strong correlation among index values which shows that

the stock markets among emerging nations are highly correlated.

Table 4: Correlation between Developed Countries

Country USA JAPAN GERMANY

USA 1 0.5510436 0.6583297

JAPAN 0.5510436 1 0.8407062

GERMANY 0.6583297 0.8407062 1
Developed nation shows a mild correlation among themselves.

Table 5: Correlation between Emerging and Developed Countries

INDI Taiwa
Country Brazil
A n
USA 0.6358 0.7812 0.6583
1 8 3
0.8666 0.8407
JAPAN
8 0.8729 1
GERMAN 0.3137 0.4561 0.2531
Y 3 3 1

The study of above table give the inference that there is a strong correlation among index values

of emerging and developed markets which shows the growing integration among the world

markets.

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 Conclusion

A key feature of global financial integration during the past three decades has reflected in the

shift in the composition of capital flows to developing and emerging market economies,

especially from official to private flows. Regional integration has served as a major catalyst to

the global integration process during the past two decades. East and South East Asian economies,

in particular, have achieved substantial integration. Apart from Asia’s growing integration with

the rest of the world, increasing integration within Asia also reflects the growing intra-

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regional trade and financial flows. Evidence from price-based measures suggests that financial

market integration in Asia has been increasing. The stock markets in Asia are more integrated

than the money and the bond markets. In the region, Japan, Hong Kong and Singapore serve as

the nodal centers for other stock markets.

In the study high degree of correlation amongst stock market indices shows that emerging

and developed markets are integrated.

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References
1. Financial Market Integration report by RBI
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/77579.pdf
2. Bringing a new perspective on co-movements of stock markets in emerging economies
through causality and wavelet analysis
https://meea.sites.luc.edu/volume17/pdfs/Celik-Baydan.pdf
3. What Are Stock Market Indices?
https://www.edelweiss.in/investology/introduction-to-stock-markets-51c006/what-is-
nifty-sensex-stock-market-indices-692d05
4. Investing Basics: What Is A Market Index?
https://www.forbes.com/advisor/investing/stock-market-index/
5. SENSEX
https://www.investopedia.com/terms/s/sensex.asp
6. IBrX 50
https://www.b3.com.br/en_us/market-data-and-indices/indices/broad-indices/brazil-50-
index-ibrx-50.htm#:~:text=The%20IBrX%2050%20is%20designed,Practices%20Manual
%20for%20B3%20Indices).
7. Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX)
https://capital.com/taiwan-stock-exchange-capitalization-weighted-stock-index-taiex-
definition
8. Nasdaq 100 Index
https://www.investopedia.com/terms/n/nasdaq100.asp
9. DAX Stock Index
https://www.investopedia.com/terms/d/dax.asp
10. DAX
https://en.wikipedia.org/wiki/DAX
11. Nikkei
https://www.investopedia.com/terms/n/nikkei.asp
12.
Data Sources
1. For SENSEX
https://www.bseindia.com/Indices/IndexArchiveData.html
2. For all other indices
https://finance.yahoo.com/

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