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Study of Co-Movement and
Interdependence of Indian Stock Market
with Foreign Stock Markets




 JASPAL SINGH ASHAN
 SHUBHAM GUPTA
 MUKESH
 CHIRAG
ANALYSIS OF TOPIC
Financial Problem: In         this project, we are going to see whether
different markets move together or find out the important differences in
the characteristics of co-movement of stock market between the
developed and emerging stock markets w.e.f. 2000to 2012 in relation with
BSE Sensex stock-prices.
NAME OF EQUITY INDEX OF DIFFERENT COUNTRIES:


Serial no.    Name of countries   Name of Equity
                                  Index
1             INDIA               BSE Sensex
2             AUSTRALIA           ASX
3             GERMANY             DAX30
4             FRANCE              CAC40
5             US                  NASDAQ
6             MEXICO              IPC ALLSHARES
7             BRAZIL              BM&F BOVESPA
8             HONGKONG            HANGSENG
9             CHINA               SSE
10            NETHERLAND          EURONEXT
11            JAPAN               NIKKEI
OBJECTIVES
   To Analyze The Performance Of Bse Sensex.
   To Analyze The Performance Of developing and
    emerging markets.
   To Know The Risk And Return Of The Bse & other
    foreign markets.
   To Correlate The Performance Of Bse Sensex With
    other foreign markets With The Help Of Returns.
   To Identify The Factors Influencing The Indices.
SCOPE
To examine the short-run causal linkages
among equity markets to better understand
how shocks in one market are transmitted to
other markets.
LITERATURE REVIEW

Initially , Under regular market conditions,
When trading by noise traders moves prices away
from fundamentals, convergence traders take
advantage of arbitrage opportunities, and stabilize
prices. However, when the wealth
Effect associated with initial losses dominates the
substitution effect.
Studies the changes in investors’ risk aversion in times
of market down turns. In our model, the link between
liquidity and returns is established via an increasing risk
a version towards illiquidity in reaction to price drops.
METHODOLOGY

DESCRIPTIVE STATISTICS
It provides simple summaries about observations that
have been made. Such summaries may be either
quantitative or visual.



    Mean : The arithmetic mean is the "standard"
     average, often simply called the "mean".
STANDARD DEVIATION
Statistics and probability theory, standard deviation
(represented by the symbol sigma, σ) shows how
much variation or "dispersion" exists from the
average .
 A low standard deviation indicates that the data
points tend to be very close to the mean and vice
versa.
REGRESSION

Regression analysis is also used to understand which
among the independent variables are related to the
dependent variable.
CORRELATION

The correlation coefficient ρX,Y between two random
variables X and Y with expected values μX and μY
and standard deviations σX and σY is defined as:
DESCRIPTIVE STATISTICS
       Descriptive statistics (Jan 2000 – Oct 2012)

         Equity index     Mean     Standard
                                   deviation
         BSE SENSEX       .0002    .00797
         SSE              .0001    .00786
         Euronext         .00000   .00629
         CAC40            -.0001   .00751
         NASDAQ           .00000   .00882
         ASX              .0001    .00506
         Hang Seng        .0000    .00781
         Nikkei           -.0001   .00749
         IPC all Shares   .0003    .00716
         DAX30            .0000    .00751
         BM&F Bovespa     .0002    .00937
DESCRIPTIVE TABLE BEFORE 17 JAN 2008         DESCRIPTIVE TABLE AFTER 17 JAN 2008

PARTICULARS      MEAN     Std.         PARTICULARS        MEAN     Std.
                          DEVIATION                                DEVIATION
ASX              -.0001   .00623       ASX                .0002    .00392
BSE              .0001    .00463       BSE                .0003    .00274
EURONEXT         -.0003   .00786       EURONEXT           .0001    .00543
IPC ALL SHARES   .0002    .00775       IPC ALL SHARES     .0004    .00680
CAC 40           -.0002   .00889       CAC 40             .000     .00653
BM&F BOVESPA     .000     .0103        BM&F BOVESPA       .0003    .00885

SSE              .000     .00628       SSE                -.0001   .00852
NIKKEI           -.0002   .00898       NIKKEI             -.0001   .00643
HANG SENG        -.0001   .00975       HANG SENG          .0001    .00640
NASDAQ           .001     .00868       NASDAQ             -.001    .00880


 By using structural break there is no change in results and
 still we can say that asx and ipc all shares are better in terms
 of return and risk.
CORRELATION
Equity index     BSE
BSE SENSEX       1
SSE              .005
Euronext         .007
CAC40            .005
NASDAQ           .047
ASX              -.010
Hang Seng        .027
Nikkei           .046
IPC All Shares   -.003      GRAPH OF DAX
DAX30            -.025
BM&F bovespa     .004
   The second graph shows the reasons of certain change in the
    market of U.S.A
CORRELATION TABLE (BEFORE & AFTER 17 JAN 2008)
      PARTICULARS             (BEFORE 17 JAN 2008)   (AFTER 17 JAN 2008)


      SENSEX/ASX              -.018                  -.011
      SENSEX/DAX              -.019                  .177
      SENSEX/EURONEXT         -.018                  .027
      SENSEX/IPS ALL SHARES   .104                   .285

      SENSEX/CAC40            -.052                  .033
      SENSEX/BM&F BOVESPA     .012                   .002

      SENSEX/SSE              .010                   -.003
      SENSEX/NIKKEI           .104                   .067
      SENSEX/HANGSENG         .200                   .082
      SENSEX/NASDAQ           .250                   .145



   Correlation before 17 jan is highest for nasdaq(.250) with bse whereas
    correlation after 17 jan is highest for ipc all shares(.285) with bse.
   During the year 2008 to 2010 India and Mexico were set to double their trade
    said by pm of mexico.
Logbse
           Logbse                                           logipcallshares
           logipcallshares




                             Before 17 Jan 2008                     After 17 Jan 2008




Correlation before 17 jan is .104 and after 17 jan is highest for ipc all
shares(.285) with bse.
REGRESSION
 Equity index     B       Sig.
 BSE(constant)    .000    .210
 SSE              .010    .625
 Euronext         .008    .752
 CAC40            .045    .037
 Nasdaq           .042    .019
 BM&F Bovespa     .001    .969
 ASX              -.024   .436
 Hang Seng        .022    .279
 Nikkei           .043    .039
 IPC All Shares   -.009   .668
 Dax30            -.032   .124
REGRESION TABLE BEFORE 17 JAN 2008             REGRESSION TABLE AFTER 17 JAN 2008
 PARTICULARS        BETA      SIGNIFICANCE
                                              PARTICULARS         BETA       SIGNIFICA
                              LEVEL
                                                                             NCE LEVEL
 ASX                -.036     .467
                                              ASX                 -.013      -.329
 DAX 30             -.021     .437
                                              DAX 30              .180       .000
 EURONEXT           -.025     .446
                                              EURONEXT            .030       .410
 IPC ALL SHARES     .114      .000
                                              IPC ALL SHARES      .328       .000
 CAC40              -.056     .033
                                              CAC40               .034       .304
 BM&F BOVESPA       .011      .619
                                              BM&F BOVESPA        .002       .942
 SSE                .009      .677
                                              SSE                 -.004      .926
 NIKKEI             .118      .000
                                              NIKKEI              .066       .038
 HANG SENG          -.026     .399            HANG SENG           -.036      .164
 NASDAQ             .015      .508            NASDAQ              .031       .290


      Before Nikkei shows greater risk (.118) with high sig.(.000) whereas Dax30
       shows greater risk (.180) with high sig. (.000) due to stock market crisis.
INTERPRETATION OF STATISTICAL RESULTS-
CONTENT AND DEPTH:

 Always investor wants to invest in a market , where
  he must go in which he gets maximum return for a
  given level of risk and minimum risk for a given
  level of return. Investor need to thoroughly analysis
  the trend of the market in order to have relative risk
  and return of his investment.
 In our project if Indian investor have surplus money
  and if he want to invest in foreign markets he must
  prefer Ipc all share that give them maximum return
  more than bse throughout our analysis.
ABILITY TO HIGHLIGHT LIMITATIONS AND
SUGGESTIONS FOR FURTHER RESEARCH:

 We could took other parameter to measure the correlation
 between foreign markets and BSE i.e.
 1. Governments measures.

    FDI(foreign policy)
    Monetary measures( CRR,SLR,REPO etc.)
    Fiscal measures(Tax policies, Govt. spending)
    Welfare of the economy

 2. Company policies(index shares).
 3. Political relations.
 4. EIC approach

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Bse correlate with the other foreign markets.

  • 1. Study of Co-Movement and Interdependence of Indian Stock Market with Foreign Stock Markets JASPAL SINGH ASHAN SHUBHAM GUPTA MUKESH CHIRAG
  • 2. ANALYSIS OF TOPIC Financial Problem: In this project, we are going to see whether different markets move together or find out the important differences in the characteristics of co-movement of stock market between the developed and emerging stock markets w.e.f. 2000to 2012 in relation with BSE Sensex stock-prices.
  • 3. NAME OF EQUITY INDEX OF DIFFERENT COUNTRIES: Serial no. Name of countries Name of Equity Index 1 INDIA BSE Sensex 2 AUSTRALIA ASX 3 GERMANY DAX30 4 FRANCE CAC40 5 US NASDAQ 6 MEXICO IPC ALLSHARES 7 BRAZIL BM&F BOVESPA 8 HONGKONG HANGSENG 9 CHINA SSE 10 NETHERLAND EURONEXT 11 JAPAN NIKKEI
  • 4. OBJECTIVES  To Analyze The Performance Of Bse Sensex.  To Analyze The Performance Of developing and emerging markets.  To Know The Risk And Return Of The Bse & other foreign markets.  To Correlate The Performance Of Bse Sensex With other foreign markets With The Help Of Returns.  To Identify The Factors Influencing The Indices.
  • 5. SCOPE To examine the short-run causal linkages among equity markets to better understand how shocks in one market are transmitted to other markets.
  • 6. LITERATURE REVIEW Initially , Under regular market conditions, When trading by noise traders moves prices away from fundamentals, convergence traders take advantage of arbitrage opportunities, and stabilize prices. However, when the wealth Effect associated with initial losses dominates the substitution effect. Studies the changes in investors’ risk aversion in times of market down turns. In our model, the link between liquidity and returns is established via an increasing risk a version towards illiquidity in reaction to price drops.
  • 7. METHODOLOGY DESCRIPTIVE STATISTICS It provides simple summaries about observations that have been made. Such summaries may be either quantitative or visual. Mean : The arithmetic mean is the "standard" average, often simply called the "mean".
  • 8. STANDARD DEVIATION Statistics and probability theory, standard deviation (represented by the symbol sigma, σ) shows how much variation or "dispersion" exists from the average . A low standard deviation indicates that the data points tend to be very close to the mean and vice versa.
  • 9. REGRESSION Regression analysis is also used to understand which among the independent variables are related to the dependent variable.
  • 10. CORRELATION The correlation coefficient ρX,Y between two random variables X and Y with expected values μX and μY and standard deviations σX and σY is defined as:
  • 11. DESCRIPTIVE STATISTICS Descriptive statistics (Jan 2000 – Oct 2012) Equity index Mean Standard deviation BSE SENSEX .0002 .00797 SSE .0001 .00786 Euronext .00000 .00629 CAC40 -.0001 .00751 NASDAQ .00000 .00882 ASX .0001 .00506 Hang Seng .0000 .00781 Nikkei -.0001 .00749 IPC all Shares .0003 .00716 DAX30 .0000 .00751 BM&F Bovespa .0002 .00937
  • 12. DESCRIPTIVE TABLE BEFORE 17 JAN 2008 DESCRIPTIVE TABLE AFTER 17 JAN 2008 PARTICULARS MEAN Std. PARTICULARS MEAN Std. DEVIATION DEVIATION ASX -.0001 .00623 ASX .0002 .00392 BSE .0001 .00463 BSE .0003 .00274 EURONEXT -.0003 .00786 EURONEXT .0001 .00543 IPC ALL SHARES .0002 .00775 IPC ALL SHARES .0004 .00680 CAC 40 -.0002 .00889 CAC 40 .000 .00653 BM&F BOVESPA .000 .0103 BM&F BOVESPA .0003 .00885 SSE .000 .00628 SSE -.0001 .00852 NIKKEI -.0002 .00898 NIKKEI -.0001 .00643 HANG SENG -.0001 .00975 HANG SENG .0001 .00640 NASDAQ .001 .00868 NASDAQ -.001 .00880 By using structural break there is no change in results and still we can say that asx and ipc all shares are better in terms of return and risk.
  • 13. CORRELATION Equity index BSE BSE SENSEX 1 SSE .005 Euronext .007 CAC40 .005 NASDAQ .047 ASX -.010 Hang Seng .027 Nikkei .046 IPC All Shares -.003  GRAPH OF DAX DAX30 -.025 BM&F bovespa .004
  • 14. The second graph shows the reasons of certain change in the market of U.S.A
  • 15. CORRELATION TABLE (BEFORE & AFTER 17 JAN 2008) PARTICULARS (BEFORE 17 JAN 2008) (AFTER 17 JAN 2008) SENSEX/ASX -.018 -.011 SENSEX/DAX -.019 .177 SENSEX/EURONEXT -.018 .027 SENSEX/IPS ALL SHARES .104 .285 SENSEX/CAC40 -.052 .033 SENSEX/BM&F BOVESPA .012 .002 SENSEX/SSE .010 -.003 SENSEX/NIKKEI .104 .067 SENSEX/HANGSENG .200 .082 SENSEX/NASDAQ .250 .145  Correlation before 17 jan is highest for nasdaq(.250) with bse whereas correlation after 17 jan is highest for ipc all shares(.285) with bse.  During the year 2008 to 2010 India and Mexico were set to double their trade said by pm of mexico.
  • 16. Logbse Logbse logipcallshares logipcallshares Before 17 Jan 2008 After 17 Jan 2008 Correlation before 17 jan is .104 and after 17 jan is highest for ipc all shares(.285) with bse.
  • 17. REGRESSION Equity index B Sig. BSE(constant) .000 .210 SSE .010 .625 Euronext .008 .752 CAC40 .045 .037 Nasdaq .042 .019 BM&F Bovespa .001 .969 ASX -.024 .436 Hang Seng .022 .279 Nikkei .043 .039 IPC All Shares -.009 .668 Dax30 -.032 .124
  • 18. REGRESION TABLE BEFORE 17 JAN 2008 REGRESSION TABLE AFTER 17 JAN 2008 PARTICULARS BETA SIGNIFICANCE PARTICULARS BETA SIGNIFICA LEVEL NCE LEVEL ASX -.036 .467 ASX -.013 -.329 DAX 30 -.021 .437 DAX 30 .180 .000 EURONEXT -.025 .446 EURONEXT .030 .410 IPC ALL SHARES .114 .000 IPC ALL SHARES .328 .000 CAC40 -.056 .033 CAC40 .034 .304 BM&F BOVESPA .011 .619 BM&F BOVESPA .002 .942 SSE .009 .677 SSE -.004 .926 NIKKEI .118 .000 NIKKEI .066 .038 HANG SENG -.026 .399 HANG SENG -.036 .164 NASDAQ .015 .508 NASDAQ .031 .290  Before Nikkei shows greater risk (.118) with high sig.(.000) whereas Dax30 shows greater risk (.180) with high sig. (.000) due to stock market crisis.
  • 19. INTERPRETATION OF STATISTICAL RESULTS- CONTENT AND DEPTH:  Always investor wants to invest in a market , where he must go in which he gets maximum return for a given level of risk and minimum risk for a given level of return. Investor need to thoroughly analysis the trend of the market in order to have relative risk and return of his investment.  In our project if Indian investor have surplus money and if he want to invest in foreign markets he must prefer Ipc all share that give them maximum return more than bse throughout our analysis.
  • 20. ABILITY TO HIGHLIGHT LIMITATIONS AND SUGGESTIONS FOR FURTHER RESEARCH: We could took other parameter to measure the correlation between foreign markets and BSE i.e. 1. Governments measures.  FDI(foreign policy)  Monetary measures( CRR,SLR,REPO etc.)  Fiscal measures(Tax policies, Govt. spending)  Welfare of the economy 2. Company policies(index shares). 3. Political relations. 4. EIC approach