GLOBAL EQUITY MARKETS A STUDY OF COINTEGRATION Golaka C. Nath, NSEIL, India Bhavesh Patel, Myers University, Cleveland ABSTRACT The interlinkage global equity markets has been widely studied covering developed markets and some of the emerging markets. This study has focused on Indian equity market’s interlinkage with some of the leading emerging markets and developed markets. We have used the Johansen’s cointegration approach and Granger’s causality to analyze the interlinkages. We have tried to use the VAR framework to test the interlinkages. We did not find any long-term equilibrium relationship among these markets. But we found that the existence of significant short-term relationship among the emerging markets excluding India. We found some amount of causality from the global markets to Indian market. The study covers the period from July 1990 to May 2003. 1. INTRODUCTION The integration of global equity markets have been a well studied topic since October 1987 though most of the studies have been conducted for the developed markets like the USA, European countries and Japan. Only recently literature has started focusing on emerging markets mainly due to 1997-98 Asian crises. In this study we have examined the interdependence of the major stock markets in Asia and linkages of South Asian stock markets with one of the stock markets of the USA, NASDAQ. Market participants of other countries widely and closely follow the NASDAQ stock exchange. NASDAQ has primarily focused on technology stocks and invited companies from other countries, specifically from emerging countries, to list their stocks in the Exchange. In many cases, common stocks are traded in local markets as well as in NASDAQ and hence theoretically it gives justification for some linkage. Further, the global investors have been flocking to various markets for diversification of risk but since similar participants operate in all these markets, losses in one market forces a global investor to liquidate his/her investment in other countries, thereby creating some amount of linkages among markets. In this study we have chosen some of the emerging markets as well as developed markets like US and Japan to study interlinkage using cointegration (or VAR) techniques. According to this approach if stock prices indices of two or more countries are found to be cointegrated then this implies that stock markets of these countries are interdependent. The rest of the paper has been arranged as follows: section 2 reviews the literature, section 3 talks of methodology, section 4 talks of data and results and section 5 conclusions. 2. LITERATURE REVIEW Taylor and Tonks (1989) studied the integration of UK market with the markets of U.S., Germany, Netherlands and Japan using monthly data on stock price indices for the sub-periods, April1973 – September 1979 and October 1979 – June 1986 and employed is a bivariate cointegration technique (Engle and Granger, 1987). They found that stock price index of the U.K. was cointegrated with the stock price index of the U.S., Germany, Netherlands and that of Japan for the later period but not for the former period. Based on these results they suggested that there was no long-term gain from diversification for the U.K investors after the abolition of exchange control. Kasa (1992) explored common stochastic trends in the stock markets of the U.S., the U.K., Japan, Germany and Canada using monthly and quarterly data from 1974 to 1990 and found that a single common stochastic trend was driving these countries’ stock markets. Byers and Peel (1993) examined the interdependence between stock price indices of the U.S., the U.K., Japan, Germany and the Netherlands using bivariate and multivariate cointegration (Johansen,