Information Stochasticity between Developed and Emerging Markets : Evidence from US-India

The globalization of economic systems and the increased pace of information transmission have amplified the contagion effect of risk, especially during financial crises, as a crisis in one region can extend internationally. Rezaei, F., & Moradi, A. (2012), Shah, A., et al (2010). In this context, the present study scrutinizes the relations and distinctiveness of price movements of emerging market (India) with developed market (US) applying open and close values of daily stock market indices from January 2001 to May 2012, using Co-integration tests, Vector error correction Model, Granger causality relationship, Impulse responses function and Variance decomposition method. The results of Co-integration tests and VECM collectively exhibit that both long-run and short-run relationships exist between the stock markets of US-India. In addition, these were magnified in the short-run during the 2007-2009 US financial crisis. From the impulse response results it can be inferred that innovations in NYSE close returns affect both open and close returns of Indian and US markets, with an increased effect on the Indian market. Similar impact is found in the case of NIFTY close returns as well. From the Variance decomposition analysis it is evident that US close and open returns marginally explain the variance of NIFTY close returns. During crisis the impact has almost doubled. In the short run US returns granger cause Indian market returns. The findings implicate that the (US index) developed market acts as a conducing indicator and information stochasticity from the US index swiftly affect the emerging stock market (Indian market)