Cointegration of Nasdaq and Sensex Data

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COINTEGRATION OF NASDAQ AND SENSEX DATA

Thesis submitted to the
Indian Institute of technology Kharagpur
in partial fulfillment
for the award of the degree

of

Master of Science
In
Statistics & Informatics

By
Satyajit Karmakar
07SI4005

Under the guidance of

Prof. Anjan Sarkar

[pic]

Department of Mathematics
INDIAN INSTITUTE OF TECHNOLOGY, KHARAGPUR
KHARAGPUR-721302, INDIA
NOVEMBER 2008

CERTIFICATE

This is to certify that this project entitled “Cointegration of Nasdaq and Sensex Data” has been successfully completed by Satyajit Karmakar (07SI4005) under my guidance and supervision, in partial fulfillment of the requirement for the degree of Masters of Science in Statistics & Informatics in the Department of Mathematics, Indian Institute of Technology Kharagpur.

Anjan Sarkar Professor November 2008 Department of Mathematics I.I.T KHARAGPUR

ACKNOWLEDGEMENTS

I express my deep acknowledgement and profound sense of gratitude to my project supervisor Prof Anjan Sarkar, Department of Mathematics, Indian Institute of Technology, Kharagpur,and Prof Kaushik Bhattacharya,IIM,Lucknow, for their inspiring guidance, helpful suggestions and persistent encouragement.

He regularly spared time for me inspite of his own engagements and guided me throughout all the difficulties that I faced. Most important of all, the interest he took in this work, was motivation enough for me to develop an interest in the subject.

I would also like to thank some of my seniors and friends for their cooperation at appropriate time throughout the completion of this project.

Date:
Place: (Satyajit Karmakar)

Abstract

Using the daily data on SENSEX and NASDAQ from January to 2nd July of 1997, the paper attempts to find out to what extent the “news” on NASDAQ helps price formation at the beginning and at the end of a trading day at the Indian bourses. The possible impact of NASDAQ on SENSEX is analyzed through OLS equations under cointegration and error correction framework. The results indicate that the "news" on NASDAQ plays an important role in price formation at the beginning of a trading day at the Indian bourses. However, as the impact of NASDAQ fades a lot during the trading hours when the Indian market remains open and the US market remains closed, the closing figures at SENSEX could not be predicted well with this information.

1 Introduction

Recent globalization and free or near free movement of capital across boundaries of nations have integrated the financial markets worldwide. Among different markets, the globalization has proceeded most rapidly in the equity markets.[1] Empirical results typically reveal significant correlations of movements across domestic and "foreign" equity markets (Dwer and Hafer, 1993; Chan and Lai, 1993; Ma, 1993; Koch and Koch, 1993). Recent technological innovations seem to have changed the concept of geographical nearness and unexpected developments at the far-off international equity markets, especially at the US market, seem to have become important "news" that influences the domestic stock markets of many economies. Studies of Eun and Shim (1993) and Schollhammer and Sand (1987) have determined that most equity markets lag the US market by one or two days. Studies on the area generally use two types of tools. In the first approach researchers specify a VAR model of returns from different markets and study the impulse response function...
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