Integration of markets during pre and post subprime crisis: Evidence from India

Abstract

With financial markets becoming far more volatile after liberalization and globalization, it becomes crucial for investors and policymakers to be considerate about dependencies among the two financial markets (stock market and foreign exchange market) and commodity market. The study tries to analyze the response of integration among the markets through the recent period of global financial crisis by making use of daily closing prices of CNX NIFTY, Indian rupees per US Dollar and COMDEX as representative for stock price index, exchange rate and commodity price index respectively. The period is from 21st Oct, 2005 to 31st Aug, 2015, which has been further divided into pre-crisis period (21st Oct, 2005 - 31st Aug, 2008) and postcrisis period (1st Sept, 2008 - 31st Aug, 2015). To investigate the long-run relationship among the markets, Johansen's co-integration technique was applied followed by VECM and Granger Causality test. Results indicate that there exists co-integration between the markets both during pre and post-crisis period. It is also found that during the pre-crisis period, causality only existed from stock market to foreign exchange market. In the post-crisis period however, significant causal relationship wasfound running from stock market to commodity market and exchange rate.