Article

Cointegration of Bombay
Stock Exchange with Major Asian
MarketsA Copula Approach

Global Business Review

17(3) 566581
2016 IMI
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0972150916630840
http://gbr.sagepub.com

Santanu Das1
Abstract
This article examines the level of cointegration of the weekly returns of Bombay Stock Exchange (BSE),
the representative index of India, with those of other major Asian markets of China (Shanghai), Hong Kong
(Hangseng), Japan (Nikkei) and Taiwan using the vector autoregression (VAR) for long-term dependencies and copulas for tail dependencies. A linear relationship is observed among all these markets, but the
upper and lower tail dependencies of the BSE with Nikkei and Hangseng are found to be much stronger.
The Clayton copula was used to study the lower tail dependency and the Gumbel copula for the upper
tail dependencies of the returns. These results will be helpful for international portfolio diversification
and the investors may find India, Japan and Hong Kong markets attractive for such diversifications. In addition, the GARCH(1, 1) methodology was also employed for studying the long-term variances of each of
the market and it is observed that the weekly volatility of Nikkei is much higher as compared to other
markets, while that of the BSE is moderate. Apart from this, all these markets show excess kurtosis, pointing towards heavy-tailedness of the return series apart from the non-normality.The VAR results show that
BSE weekly returns are affected by up to two lags of the Hong Kong stock market (HANG). At the same
time, the NIKKEI and the SHANG are affected by up to 1 week and 2 week lags of the BSE, respectively.
Keywords
Cointegration, copula function, Bombay Stock Exchange

Introduction
Globalization of the world trade has resulted in increased interdependencies among the markets. The
contagion effect of development in one market has in many cases immediate impact on other markets.
This phenomenon is known as cointegration. The study of cointegration among asset returns has longterm implication for financial managers as well as for fund managers. This helps in international risk
diversification (Eun & Shim, 1989; Joen & Furstenberg, 1990; Longin & Solnik, 1995). Moreover,
research has shown that it is not only the stock markets that are mutually interdependent but the
1
Assistant Professor, Finance & Accounting, International Management Institute, IDCO Plot No. 1, Gothapatna, PO Malipada,
Khurda, Bhubaneswar, Odisha, India.

Corresponding author:
Santanu Das, Assistant Professor, Finance & Accounting, International Management Institute, IDCO Plot No. 1, Gothapatna, PO
Malipada, Khurda, Bhubaneswar 751003, Odisha, India.
E-mail: Santanu@imibh.edu.in

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Das

contagion effect exists in the banking sector (Weib, 2012) as well as the mutual funds industry too
(Gregoriou & Pascalau, 2012). In other words, the markets and other economic agents are correlated
with each other to the extent that a movement of a particular variable might influence another variable in
two different regions. A thorough understanding of the financial markets across the world in general and
across the particular region in particular is a prerequisite for portfolio managers. However, it is often
difficult to establish a relationship in a multivariate framework among the stock markets. Regional similarity may have an impact on the long-term dependencies. A recent article by Mukherjee and Mishra
(2010) studies the spillover effect of returns of the Indian stock market on major Asian indices, finds
evidence of positive and significant correlation of contemporaneous intra-day returns. In yet another
study, Agnor (2003) contends that the benefit of financial integration outweighs the costs when mechanisms for maintaining financial stability are in place. In their article, Longin and Solnik (1995) have
tested the hypothesis of constant conditional dependencies among stock markets and they report that the
correlation, on an average, increases in periods of high volatility in the US market.
Many studies establish the existence of the contagion effect among the financial markets by
using multivariate GARCH models or its variants like factor GARCH (FARCH), exponential GARCH
(EGARCH) and even the vector autoregression (VAR).1 For example, Hamao, Masulis and Ng (1990)
and Susmel and Engle (1994) have measured the interdependence of returns and volatilities across stock
markets using a multivariate GARCH set-up. In another study, Mukherjee and Mishra (2010) use the
GARCH model to account for time variant conditional variances. Kumar and Dhankar (2011) studied the
asymmetric nature of US stock market return and effect of heteroskedasticity on stock return volatility
using GARCH(1, 1) and TAR-GARCH(1, 1) and found that there is no correlation between stock
returns and conditional volatility; however, the relationship between stock returns and standardized
residuals is found positively significant. However, one of the assumptions in the GARCH model is
assigning equal weight to small and larger returns. Due to market complexities which exist in different
forms in different markets they may not be appropriately modelled using the GARCH models. An important issue is how to measure the interdependencies between stock returns when they are not normal or
come from different distributions. This is especially the case with international markets, which often
show asymmetric dependence. In this article, we use the so-called copula functions to model the dependencies among the India and Asia-Pacific markets. Recent studies show that copulas are helpful for
modelling asymmetries and asymptotic dependence (see Bartram, Taylor & Wang, 2007; Jondeau &
Rockinger, 2006; Kole, Koedijk & Verbeek, 2007). Apart from this, we also use the structural VAR
model methodology to examine the dynamic linkages among the stock markets.
The stock markets of the Asian region have shown consistent resilience to the recent global meltdown
and other financial crisis of the past. Indian stock market, in particular, has withstood such shocks and
this is one of the reasons why investors across the globe have been showing keen interest in investment
in India. The Indian stock market with the Bombay Stock Exchange (BSE 30) and S&P CNX Nifty as its
representative indices has evolved into one of the most important investment destinations over the last
decade. The market capitalization of BSE 30 has increased from $125.61 billion in 20012002 to about
$1,210 billion in 20112012, a staggering growth about tenfold. Therefore, a better understanding of the
markets in this region will help portfolio managers and firms to manage financial risks that may arise.
Although, there are many studies on the volatility structure of Indian stock market and its linkage with
other Asian markets, but the structural differences among these markets have not been taken into account.
This is the major contribution of this article, in which we use the copulas to understand the dependencies
assuming that the returns come from different distributions. According to our knowledge, no attempt has
been made yet to study the asymmetric relationship of the BSE with other major Asian markets. Apart
from this, the short-term dependencies are also studied using the VAR model. This approach is adopted
because of the existence of strong contemporaneous correlations among Asian stock markets (Cheung,
1997; Janakiramanan & Lamba, 1998). The motivation for applying copulas is that they are flexible and

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can map different return distributions onto a normal one. As it is concerned with finding tail dependencies, extreme market behaviour can easily be captured which the linear correlation parameter fails to do.
This article is further organized as follows: the second section deals with data and methodology; the
objectives of the study are outlined in the third section; the fourth section deals with model development;
the results are discussed in the fifth section; and the sixth section gives the conclusion.

Data and Methodology

The data have been sourced from finance.yahoo.com. It includes weekly index values of BSE 30 and
four other Asian stock exchangesHangseng (HANG), Taiwan (TAIWAN), Nikkei (NIKKEI) and
Shanghai Composite (SHANG) indices from 7 July 1997 to 24 December 2012 (see Figure 1). The
original data has a maximum of 832 weekly observations of Nikkei. However, due to different trading
days and holidays, the data is reduced to 782 weekly observations with same number of trading days.
The weekly returns are calculated by taking the natural logarithm of index values between two
consecutive observations. Therefore, if St is the index value at time T = t and St1 is the value at time
T = t 1, then weekly return of the index is defined as:

ln e

St
o
St - 1

In order to assess the interdependencies among the Asian stock markets, we propose to use the copula
functions. As already mentioned, most of the financial time series exhibit asymmetrical distribution and,
therefore, it will be inappropriate to show the dependencies through linear correlation coefficient. Under

(Figure 1 continued)

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Das
(Figure 1 continued)

Figure 1. Weekly Index Values and Weekly Returns

Source: Authors Own.

extreme economic conditions, most of the macroeconomic variables and financial markets show the
common trend and in this study, we incorporate the two copula functionsClayton and Gumbel Copulas.
Apart from this, the short-term dependencies are also studied through the use of VAR models. VAR
models are suitable when the time series shows no unit root and are stationary. For this, we conduct the
augmented DickeyFuller test (ADF) on both the index and return series. The variances are decomposed
using Cholesky decomposition method using 1 standard deviation. The GARCH parameters are also
reported for the long-term volatility of the indices and also to know its persistence.

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Objectives of the Study

1. To understand the interrelationships, if any, of the BSE with the major indices of Asia.
2. To establish the importance of copula functions with respect to linear correlation coefficient in
understanding the interrelationship.
3. To study the lower and upper tail dependencies through copulas among these markets and, hence,
understanding the importance of the bullish and the bearish markets on portfolio returns.

Model Development
The GARCH(1, 1) Model and Long-term Variances
In order to model long-term variances, the GARCH(p, q) models are most appropriate wherein the
variances are a function of lagged error terms and variances. If we denote v2t and ft as the variance and
innovations of the return series, respectively, then under GARCH specification,
p

t=1

t=1

v 2 t = m 0 + | av t2- 1 + | bf 2t - 1(1)

where m0 is the constant term. For a series to be persistent and stationary a + b 1. The long-term
variance is calculated as:
m0

(2)
j=
1- a - b

The VAR Model

In order to capture short-term correlation of BSE with that of other Asian markets, we construct
the VAR model. We also plot the impulse response diagram to know the effect of one standard
deviation shock on the weekly returns. The variance decomposition of the variances is also reported.
A VAR model is suitable when the return data are stationary and contain no unit root. For this, we
conduct the standard ADF test and the results are reported in Table 1. As we are studying the correlation
of the BSE with four other indices, the VAR equations are written as:

BSE t = a 0 + a 1 BSE t1 + a 2 HANG t1 + a 3 NIKKEI t1

+ a 4 SHANGHAI t1 + a 5 TAIWAN t1 + f 1
HANG t = b 0 + b 1 BSE t1 + b 2 HANG t1 + b 3 NIKKEI t1
+ b 4 SHANGHAI t1 + b 5 TAIWAN t1 + f 2
NIKKEI t = c 0 + c 1 BSE t1 + c 2 HANG t1 + c 3 NIKKEI t1
(3)
+ c 4 SHANGHAI t1 + c 5 TAIWAN t1 + f 3
SHANGHAI t = d 0 + d 1 BSE t1 + d 2 HANG t1 + d 3 NIKKEI t1
+ d 4 SHANGHAI t1 + d 5 TAIWAN t1 + f 4
TAIWAN t = e 0 + e 1 BSE t1 + e 2 HANG t1 + e 3 NIKKEI t1
+ e 4 SHANGHAI t1 + e 5 TAIWAN t1 + f 5

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Table 1. Test for Unit Root (augmented DickeyFuller)
Variable
BSE
DBSE
Hangseng
DHangseng
Nikkei
DNikkei
Shanghai
DShanghai
Taiwan
DTaiwan

Test Statistic

p-value

0.324
26.81
1.417
27.02
2.099
28.929
1.548
23.56
2.512
28.25

0.91
0.000
0.574
0.000
0.245
0.000
0.528
0.000
0.11
0.000

Source: Authors Own.

Table 2. Cholesky Decomposition of Variance

Variance
Period

Decomposition of Bombay Stock Exchange (BSE)

BSE

2
4
6

98.49
97.04
97.03

2
4
6

22.32
22.18
22.18

2
4
6

17.42
17.59
17.59

2
4
6

3.82
4.519
4.53

2
4
6

12.98
13.036
13.04

Hangseng

Nikkei

Shanghai

Taiwan

1.075
0.0382
0.09037
2.488
0.0487
0.10855
2.492
0.0493
0.1101
Decomposition of Hangseng (Hangseng)
77.63
0.049
0.0452
77.34
0.154
0.076
77.34
0.154
0.076
Decomposition of Nikkei (Nikkei)
15.0013
67.329
0.2451
14.9836
67.031
0.2681
14.98
67.02
0.269
Decomposition of Shanghai (Shanghai)
3.074
0.1438
92.91
3.57
0.329
91.49
3.57
0.338
91.46
Decomposition of Taiwan
13.79
3.406
0.4114
13.86
3.429
0.9341
13.86
3.429
0.9357

0.2989
0.3138
0.3126
0.1037
0.2413
0.2413
0.0003
0.1253
0.1265
0.039
0.089
0.092
69.72
68.73
68.73

Source: Authors Own.

Notes: All figures are in percentage.

On the basis of the above results, we perform the Cholesky decomposition of variances. The
results are reported in Table 2. In the above equations, the first term on the right side are constants
and fis are the error terms that may be contemporaneously correlated but not with their own
lagged values.

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Copula Function
A copula is, therefore, a joint distribution function which is formed by two marginal distributions.
In other words, a marginal distribution function f(x) another f(y) are mapped onto a joint copula function
C(f (x), f (y))}, where } is a set of information available at time t 1. Copulas are, therefore, extremely
useful for studying the correlation between variables which are coming from different distributions.
Of late, copulas are extensively being used in risk management and in studying financial market cointegration (Rodriguez, 2007). The financial time series most often show non-normal distribution of returns
besides heavy-tailness and skewness. Apart from this, the correlation between these returns have nonlinear structures which cannot be fully explained by classical correlation coefficients.
Let F(x) is the marginal distribution of a variable x and F(y) be the marginal distribution of y and the
joint distribution of x and y is G(x,y), then for every (x,y), the copula function C is shown as:
C (F (x), F (y)) = G (x, y)(4)

In financial time series data, however, the change in one variable is conditional upon other(s). In order
to incorporate conditionalities in the above copula we use a conditional parameter X such that F1|X and
F2|X be the marginal distribution of x and y, respectively, conditional upon X. Then, the copula function
is defined as:
F1,2 | X (x, y | X) = C (F1 | X (x | X), F2 | X (y | X) | X)(5)

The bivariate distribution so constructed, which need not be normal, can be used in financial research,
especially in time series data. The bivariate distribution can be represented by using different form of
copula in the copula family. Notable among them are Gaussian copula, Gumbel Copula, Clayton copula,
t-copula and Frank copula and we describe the first three. The results, however, are calculated only for
Clayton (lower tail dependency) and the Gumbel Copula (upper tail dependency) owing to their different
tail dependencies.
The Gaussian copula is the most basic copula distribution and can be represented as:
z -1(x) z -1(y)

where,

zp

(z -1 (x), z -1 (y)) =

-3

-3

s 2 - 2tst + t 2
1
# *- 2(1 - t) 4dsdt(6)
e
2r (1 - t 2)

U1 is the inversion of cumulative distribution function (cdf ) of standard normal distribution, Up is the
cdf of standard bivariate normal distribution with Pearson correlation . The bivariate Gaussian copulas
do not have tail dependence (left or right) and the distribution is symmetric.
In order to incorporate tail dependencies, Embrechts et al. (2005) suggests using the Clayton copula
for lower tail dependencies and Gumbel copula for upper tail dependencies. The Clayton copula with the
dependence parameter i d(0,3) can be written as:

max 7(x - a + y - a - 1) -1/a, 0A(7)

where a is the copula parameter and x and y are the variables with a marginal distribution of f (x) and
f (y), respectively. The copula parameter exhibits lower tail dependence and zero upper tail dependence.
The lower tail dependence (ml) is normalized as 21/a. When a = 0, there is no tail dependence.

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(Figure 2 continued)

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(Figure 2 continued)

Figure 2. Contour Plots of the Copulas

Source: Authors Own.

The Gumbel copula with dependence parameter i d[0,3) is represented as:

C (x, y | X) = exp{- [(- ln x) i +(- ln y) i] i }(8)

where exp is the exponential function and ln is the natural logarithm. For i > 1, the copula generates an
upper tail dependence and maximum dependencies is achieved when i 3. The Gumbel parameter i
is normalized as (mu) 221/i.
After calculating the copula parameters, we simulate 1,000 observations between BSE and other
indices and plot the results through a scatter diagram as shown in Figure 2. This will give us a deeper
insight into the tail dependencies among the indices. We can see that the left tail cohesiveness (Clayton
copula) is more prominent for the BSEHANG pair followed by BSENIKKEI and BSETAIWAN
pairs. As far as right tail dependency is concerned, we find that BSEHANG and BSENIKKEI pairs are
more correlated. In either case, the correlation structure between BSESHANG pair is very weak.

Results and Discussion

The descriptive statistics are shown in Table 3. All the indices except Shanghai Stock Exchange show a
positive median value of weekly return in the range of 0.0581 per cent (Nikkei) to 0.5194 per cent (BSE).
The greatest volatility is shown by the Nikkei with the maximum weekly return of 11.4 per cent and
minimum return of 27.88 per cent. The heavy tailedness is shown by the excess kurtosis, where each
index shows excess kurtosis of more than one. The JarqueBera test rejects normality assumption in all
cases, thus confirming the fact that financial time series show non-normal distributions.
The VAR results are shown in Table 4. We find that the BSE weekly returns are affected by up to
two lags of the Hong Kong stock market (HANG). At the same time, the NIKKEI and the SHANG
are affected by up to 1-week and 2-week lags of the BSE, respectively. The shock generated in the
BSE persists in the BSE for up to 3 weeks (Figure 3). The impulse response figures also show that
one standard deviation shock in the HANG market generates the ripple effect in the BSE for about
1 month.

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Table 3. Descriptive Statistics of Weekly Returns

Mean
Median
Maximum
Minimum
Skewness
Excess kurtosis
Jarque-Bera
Number of weekly
observations.

BSE

Hangseng

Nikkei

Shanghai

Taiwan

0.001926
0.005194
0.1317
0.1738
0.4015
1.89
137.3*
781

0.000510
0.00223
0.1617
0.1992
0.3646
3.21
354.3*
781

0.000887
0.000581
0.114
0.2788
0.9733
7.9
2154.3*
781

0.00844
0.000
0.1394
0.1489
0.1091
1.86
114.3*
781

0.00253
0.00263
0.1831
0.1429
0.1559
1.95
127.98*
781

Source: Authors Own.

Note: * indicates significant at 1%.

Table 4. VAR Results

BSE (1)
BSE (2)
Hangseng (1)
Hangseng (2)
Nikkei (1)
Nikkei (2)
Shanghai (1)
Shanghai (2)
Taiwan (1)
Taiwan (2)
Constant

BSE

Hangseng

Nikkei

Shanghai

Taiwan

0.04011
(0.957)
0.005498
(0.1318)
0.0904
(1.955)
0.1269
(2.739)
0.012355
(0.241)
0.01466
(0.28)
0.0382
(0.966)
0.021
(0.523)
0.0677
(1.523)
0.023
(0.524)
0.0019
(1.257)

0.002204
(0.5126)
0.033256
(0.777)
0.0358
(0.75601)
0.0594
(1.25)
0.04041
(0.77)
0.0544
(1.03)
0.0269
(0.665)
0.0254
(0.631)
0.0403
(0.8952)
0.044
(0.988)
0.00057
(0.375)

0.0567
(1.546)
0.02887
(0.79)
0.03447
(0.85133)
0.011604
(0.2861)
0.075
(1.67)
0.0544
(1.2)
0.0479
(1.38)
0.0123
(0.351)
0.0021
(0.053)
0.033
(0.8633)
0.0011
(0.952)

0.0681
(1.7456)
0.1205
(3.105)
0.047
(1.1)
0.083
(1.923)
0.015021
(0.3151)
0.066
(1.39)
0.0379
(1.031)
0.074
(2.03)
0.0226
(0.553)
0.0201
(0.497)
0.00033
(0.272)

0.0563
(1.3706)
0.0235
(0.5821)
0.0949
(2.09)
0.004631
(0.1019)
0.01233
(0.245)
0.04204
(0.8311)
0.05
(1.29)
0.0601
(1.55)
0.0811
(1.88)
0.012
(0.291)
0.0005
(0.391)

Source: Authors Own.

The Cholesky decomposition results are shown in Table 2. We find that the weekly variances in the
BSE are not much affected by those in other markets. In fact, it is the other way round. The variances of
the HANG is affected to the tune of 22 per cent by that of the BSE and is found to be persistent even up
to 6 weeks. This is followed by NIKKEI, TAIWAN and SHANG, in that order. In fact, the impact of the
variances of the BSE is increasing in the cases of NIKKEI, SHANG and TAIWAN. The results show a
close relationship among the markets, except that of NIKKEI which possibly is more affected by the
markets in the US and the Euro region (see Peng & Ng, 2012).

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(Figure 3 continued)
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Source: Authors Own.

Figure 3. Impulse Response Functions

(Figure 3 continued)

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Table 5. GARCH(1, 1) Estimates

Mean
Constant
GARCH (b)
ARCH (a)
Weekly variance (%)
Daily variance (%)

BSE

Hangseng

Nikkei

Shanghai

Taiwan

0.0019
2.62e05
(2.31)
0.9166
(52.38)
0.0635
(5.11)
0.13
0.78

0.00051
1.132e05
(1.7)
0.9025
(52.1)
0.0917
(5.6)
0.19
1.171

0.00089
0.00059
(6.7)
0.134
(1.39)
0.26
(10.8)
0.09
0.58

0.000844
5.92e05
(4.3)
0.833
(24.57)
0.116
(4.67)
0.116
0.69

0.000254
2.19e05
(3.1)
0.894
(47.15)
0.091
(4.88)
0.146
0.876

Source: Authors Own.

Note: Figures in parentheses are t-values.

Table 5 presents the GARCH(1, 1) results. The table also shows the long-term variance on a weekly
and daily basis. The daily variances are calculated assuming 252 trading days in a calendar year. The
GARCH parameters of all indices, except Nikkei, are highly persistent. This is an indication of volatility
clustering in which the returns (large or small) shows slow decay process. The weekly returns vary from
0.09 per cent (Nikkei) to 0.19 per cent (Hangseng). The weekly returns of Shanghai, Taiwan and BSE
are close to each other. However, the daily variances vary for each of the index. It ranges from as low as
0.58 per cent (Nikkei) to high of 1.17 per cent for Hangseng.
In order to carry out VAR modelling, we must be sure that the series do not exhibit any unit root
and are cointegrated. We perform the ADF test for unit root identification and the results are reported in
Table 1. The index values in their level values show unit root while their first differences do not. This
shows that all the indices are cointegrated to the order of 1, that is, they show I(1). This result is important
as it shows that VAR methodology can be applied for short-term dependencies.
In Table 6, we report the correlations of BSE with other markets. It is seen that there is a positive and
significant correlations of the BSE with all the Asian markets. The Spearmans correlation is highest for
BSEHangseng pair with about 48 per cent correlation. As far as tail co-exceedances are concerned, we
find that both the left and right tail correlations are highest for the BSEHANG pair followed by BSE
NIKKEI pair. A striking feature of the correlation results is that except the SHANG, all other indices
have significant right tail correlation with the BSE. This shows that there are fundamental differences
Table 6. Correlation Coefficients between BSE and other Indices
Hangseng
Spearmans
Clayton (a)

(ml)
Gumbel (i)

(mu)
Gaussian

0.473
1.795
0.679
1.8975
0.56
0.3136

Nikkei
0.413
1.407
0.611
1.7035
0.497
0.271

Shanghai

Taiwan

0.1637
0.3915
0.171
1.1957
0.2147
0.1047

0.3541
1.0963
0.531
1.5481
0.4355
0.2304

Source: Authors Own.

Notes: 
All values are significant at 1%. a and i are respective copula parameters and ml & mu are the normalized Clayton and
Gumbel correlation coefficients.

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Figure 4. Copulas on 1000 Simulated Observations.

Source: Authors Own.

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in the market structure between India and China. The contour plots for both Clayton and Gumbel copulas
give the visual indication about the correlation structure (Figure 2). Note that there is a significant
increase in the tail correlations when we use the copula functions than the normal linear correlations.
These results are important for a portfolio manager who may want to diversify the portfolio across the
Asian region as it points to the relationship among the extreme returns. The scatter diagrams (Figure 4)
also shows high tail correlations of BSE with Hangseng, Nikkei and Taiwan. The scatters are obtained
on the basis of 1,000 simulated observations on the basis of copula parameters.

Conclusion
The study is based on the assumption that there exists a non-linear relationship of financial time series
and there is a need to identify the existence of tail relationships among the series returns. The results
show that there exist tail dependencies among the stock markets in the Asian region. We find that the
BSE shows a high upper and lower tail dependencies with the HANG (the representative index of Hong
Kong) followed by that of the NIKKEI (Japan) and TAIWAN. These findings may find importance with
the portfolio manager for international diversification. Although, the study does not take into account the
joint impact of macroeconomic variables like interest rates, inflation, GDP growth rate etc., it still is
indicative of the extreme relationship of the Indian market with those of the other markets. The copulas
correlate the bullish and the bearish markets and any negative relationship among the returns will help
in reducing the overall portfolio risk. This study can be extended to include daily returns so that the
portfolio rebalancing on a daily basis could be suggested. In a highly volatile business environment, it is
important to manage the funds in a manner that the risk of capital loss could be reduced. Any portfolio
manager looking to diversify investments in India can potentially look for diversification to Japan and
Hong Kong market. It is also observed that all the markets under study show excess kurtosis pointing
towards heavy tailedness of the return series apart from the non-normality. The financial integration may
be the result of the fact that a large and common group of investors are investing in these market, resulting in the channelization of money from one market to the other. India has been a favourite destination
for FII investors recently because it not only offered them the desired returns but the much needed safety
of their investments. The VAR results also indicate that while the BSE is affected by the Hangseng, it
transmits a persistent information to the Japanese and the Taiwanese market. No relevant evidence of
cointegration of the Indian market with that of the Chinese was observed. This may be due to the differences in the fundamentals on which these markets are based. It may be contended that while Chinese
market is export driven, the Indian economy is more of demand driven. The investors, therefore, may
find it useful to diversify their portfolio in Hong Kong and the Japanese markets.
Further studies may be undertaken on volatility transmission and the level of cointegration of these
markets by considering mentioned macroeconomic data and also using any structural change in these
markets.
Acknowledgment
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Note
1. VAR is a technique where every endogenous variable in a system is regressed upon lagged values of all other
endogenous variables.

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Das
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