Investigating Impact of US, Europe, Frontier and BRIC Stock Markets on Indian Financial Stress Index

Amanjot Singh () and Manjit Singh ()
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Amanjot Singh: University School of Applied Management
Manjit Singh: University School of Applied Management

Journal of Banking and Financial Economics, 2016, vol. 2, issue 6, 23-44

Abstract: The emerging markets are slowly opening up their respective financial markets to foreign investments, thereby making the latter markets more sensitive to cross-market information transmissions. There are different transmission mechanisms ranging from trade related to financial linkages. However, statistically, both price discovery and conditional volatility act as transmission mechanisms, whereby information in one stock market has an impact on another. In this regard, the present study attempts to empirically analyse the impact of global information transmissions, i.e., stock market returns and conditional volatility on overall Indian financial stress and its various sub-components by employing different econometric models comprising Johanson Cointegration, Vector Autoregression and its various counterparts, Component GARCH (1,1) model and multivariate OLS regression models ranging from October 2003 to October 2014. The study firstly constructed Indian financial stress index owing to non-existence of a standardised index. The results reported that the one month lagged returns in the BRIC stock markets have an impact on the financial stress index of India. The stress in the Indian financial system responds statistically signifi cantly to the Brazilian and Chinese market returns, with a greater degree of integration after two months. A statistically signifi cant impact of the shortrun volatility has also been observed running from the European markets to the Indian financial system contemporaneously. Furthermore, unexpected volatility in the BRIC markets also has an impact on the Indian financial stress contemporaneously as well as dynamically. The present study provides an insight to the international investors regarding the response of Indian financial system and its sub-components toward global information transmissions.

Keywords: BRIC; financial stress; frontier markets; transmission. (search for similar items in EconPapers)
JEL-codes: F36 G10 G15 (search for similar items in EconPapers)
Date: 2016
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