Empirical Analysis of the Causality between Indian and U.S. Stock Markets’ Conditional Volatility : Further Evidence

This paper is an attempt to investigate the dynamic relationship between U.S. and Indian stock markets through the conditional volatility of two stock markets, during the 1995-2007 period, using the monthly data of BSE listed BSE 100 and NYSE listed S & P 500 indices. The research methodology employed includes testing of stationarity with Dickey Fuller test, the use of two stages GARCH (1,1) model wherein in first stage conditional volatility of both stock markets is estimated, and then it is used as exogenous variable to estimate further conditional volatility of both stock markets. The study also employs linear regression model to test the relationship between conditional volatilities of two markets, and finally Granger causality test to find out the causal relationship between conditional volatilities of two stock markets. The study confirms the interdependency of Indian stock market on U.S stock market by reporting strong relationship between conditional volatilities of two markets. The study highlights the interdependency among the stock markets in question and facilitates the investors for diversification of funds. In fact, in the age of globalization, stock markets integration has become a matter of great importance for fund managers and investors, which facilitate to scale down the portfolio risk through diversification of funds across the stock markets