Title: Integration of the Indian stock market with the world market: a study based on the time-varying Kalman filter approach
Authors: Srinivasa Rao Gangadharan; Dilip Kumar
Institute for Financial Management and Research, 24, Kothari Road, Chennai – 600034, India
Indian Institute of Management Kashipur, Bazpur Road, Udham Singh Nagar, Kashipur – 244713, Uttarakhand, India
Abstract: This paper examines the time-varying integration of the Indian stock market with the world market using Kalman filter approach. We consider major stock indices from the Indian stock market which includes S&P CNX Nifty, CNX 200, S&P CNX 500, CNX Nifty Junior, CNX Midcap and CNX Smallcap. Our approach involves the computation of an appropriate return index, based on the capital asset pricing model (CAPM), which can capture the sensitivity of the given stock returns to the market risk. Our findings confirm the time-varying integration of the S&P CNX Nifty with the world market over the study period. However, S&P CNX 500, CNX 200 and CNX Midcap exhibit deviation from the integration relationship during the period of the global financial crisis. The CNX Midcap and CNX Smallcap display deviation from the integration relationship during most of the periods before sub-prime crisis.
Keywords: Kalman filter; international capital asset pricing model; ICAPM; CNX Nifty; CNX 200; CNX 500; CNX Midcap; CNX Smallcap; CNX Nifty Junior; World Index; US Treasury Bill; time-varying coefficient.
Int. J. of Accounting and Finance, 2017 Vol.7, No.2, pp.110 - 126
Date of acceptance: 24 Dec 2016
Available online: 13 Jul 2017