Seminar Paper 2011

Integration of Indias stock market with Asian stock markets Seminar Paper Presented to

Mukesh Patel School of Technology Management and Engineering, SVKMs NMIMS University
In Partial Fulfilment of the Requirement for the Degree (MBA Tech) By Gaurav Kalya 312 2012

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Contents
ACKNOWLEDGEMENT ............................................................................................................................. 3 ABSTRACT................................................................................................................................................ 4 THE TREND OF FII IN INDIA BETWEEN 2001- 2010 ................................................................................. 6 RECESSION (2007-2009) ...................................................................................................................... 7 LITERATURE REVIEW ............................................................................................................................... 8 STOCK EXCHANGES AND INDICES ......................................................................................................... 10 METHODOLOGY .................................................................................................................................... 15 STATISTICAL MODELS ............................................................................................................................ 16 RESULTS AND ANALYSIS ........................................................................................................................ 19 GRAPHS ................................................................................................................................................. 20 COINTEGRATION ............................................................................................................................... 23 CONCLUSION......................................................................................................................................... 26 REFERENCES .......................................................................................................................................... 27

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ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Prof. R.C Agarwal (Faculty Mentor) for his inputs and feedback in developing the seminar paper. The guidance provided by him has helped me immensely to input content in the paper. The seminar paper has helped me in understanding the impact of Indian stock market on the performance of other Asian markets and vice versa. The research has enabled me to gain an insight of the parameters involved in the trading activity and would be of great help to me during the future course of my studies. I also would like to thank the Institute for providing me the opportunity to express my views through the seminar paper which has enabled me to gain an in-depth understanding of the topic undertaken by me.

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ABSTRACT
Due to increasing globalization and liberalization of financial markets since late 1980s, there is an increase in the interdependence of stock markets of different countries around the world. The capital markets have come closer and are more integrated. This increase gives new opportunities to international investors to diversify their portfolio by reducing potential risk associated to each investment. They can choose to invest in the markets where returns are not correlated. Stock markets are the true indicators of the economy as they are the source of direct financing which plays a major role in growth of the country. They reflect the domestic economic conditions as well as the confidence of investors in an economy. Financial markets all over the world have become more integrated, within as well as across boundaries, due to deregulation, globalization and advancement in information technology. India is one of the fastest growing economies with expanding capital market and increasing FIIs. The Indian financial system has undergone a major transformation in the past two decades as a result of various economic and financial sector reforms initiated by the Government. Changes in the operating framework of monetary policy along with other liberalization measures enabled change in interest rates and competitive pricing of the products. With the automation of trading and communication system, NSE and BSE became an international stock exchange where every investor has equal access across the world. There are continuous increases in share of the listed foreign firms and in share of the non-residents stock transactions. The reforms started in 1991 not only allowed NRIs and FIIs to invest in Indian market but also encouraged Indian companies to tap global market using ADRs and GDRs. Since the mid-1990s, international financial markets have experienced several episodes of economic and financial distress. The major financial crisis observed in recent years was the recession of late 2000s of which the consequences are visible even now. During this period, financial markets interlinkages and interactions played a crucial role, as the high level of integration between countries, and between their financial markets were a major source of spill over effects, that led to extreme volatility in the worlds financial markets. Taking these facts into consideration, the current analysis will look at how Indian equity markets respond to the price movements of other major Asian financial markets. The main objective of the project is to study the degree of integration varies over the period of 2001 to 2010 and the causal relationship between Indian stock index and other indices.
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In this study stock indices of the major stock exchanges such as BSE Sensex (India), SSE (China), Nikkei 225(Japan), Korea SE Composite (Korea), HangSeng (Hong Kong), and JKSE (Indonesia) are considered. In order to study the level of integration, the complete time-frame is divided into three periods: 2001-03, 2004-06 and 2007-10. The data analysis will be done separately for each period. There is a separate analysis of integration during the recession and period after that. The time series can be checked for stationarity using unit root tests like Augmented Dickey Fuller test and cointegration using Engle-Granger test. To study the direction of causality, various models like Granger causality etc. can be used. The remainder of this paper is organised into the following sections: i) First, a brief review of reforms in the Indian financial market is presented; ii) second, review of the literature; iii) third, the data and methodology are outlined; iv) fourth, the empirical findings are presented and discussed, v) and finally, the paper concludes, and some suggestions for further research are discussed.

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BRIEF HISTORY OF INDIAN STOCK MARKET AND ITS REFORMS
The Indian stock exchanges hold a place of prominence not only in Asia but also at the global stage. It has one of the oldest stock exchanges in Asia which is known as Bombay Stock Exchange that started in 1875. It largely remained outside the global integration process until early 90s when many developing countries started the reform process with the aim of liberalising financial sector. Recognising the critical importance of financial assets to the economy, India pursued a policy of gradual liberalisation of capital movements while strengthening its financial sector infrastructure. Securities and Exchange Board of India was established in 1988 to frame rules and guidelines for various operations of the stock exchange in India. Over the decade of 90s, many new systems were introduced such as dematerialised trading of securities, electronic trading, clearing & settlement mechanism, introduction of derivative segment by replacing the forward trading system called badla and the introduction of new investment instruments. The traditional role played by stock exchanges i.e. self-regulatory, controlled and governed by members or governments changed due to advances in information technology, growing competition, and globalization and led to a more efficient and transparent system. National Stock Exchange (NSE) was created by the Government of India which was one of the first securities exchanges in the world to pioneer the demutualised structure and set up a nationwide electronic trading with paperless settlement. Bank deregulation led to the growth of several private banks and resulted in lower interest rates. A major transformation took place when restrictions were removed on foreign investment flows, especially on direct investment inflows.

THE TREND OF FII IN INDIA BETWEEN 2001- 2010

Presently, India is allowed to invest in all categories of securities traded in the primary and secondary segments and in the derivative segment. The limit on aggregate equity of FIIs including NRIs (non-resident Indians) and OCBs (overseas corporate bodies) in a company engaged in activities other than agriculture and plantation has been reduced in phases. Further, with the financial sector reforms initiated in 1991, not only FIIs and NRIs are allowed to invest in Indian stock markets, Indian corporate have also been allowed to tap the global market with global depository receipts (GDR), American depository receipts (ADR) and foreign currency convertible bonds (FCCB) since 1993 [1]. According to the portfolio investment scheme (PIS), an FII can invest up to 24% of the paid up capital of the Indian

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company. However, board can raised the ceiling up to sectoral cap for that particular segment. The following graph shows the movement of FII during this period.

RECESSION (2007-2009)
The current crises emerged after the US housing prices dropped moderately in 2006-07, and after the US sub-prime mortgage markets made huge losses. In turn, these generated chaotic effects throughout the international financial system. Thereafter, the economic slowdown is spread to other markets. The confidence in many financial institutions was strongly damaged and share prices for investment banks dropped significantly at the end of 2007 and early 2008. The above analysis clearly supports the fact that the stock market in India has witnessed a phenomenal but uneven growth post liberalization which has been accelerated by the increasing activities of multinational companies. Thus, it is very interesting to know how far India has gone down the road towards international stock market integration, and whether any linkages have taken place among the stock indices of India and worlds major stock indices. The relationship between Indian stock markets and major developed stock markets by analyzing empirically the long-run pair-wise cointegration relationship and short-run dynamic Granger causality linkages between the Indian stock market and the major developed markets.

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LITERATURE REVIEW
The nature of the international transmission of stock returns and interlinkages between market indices has been focus of extensive studies. Now-a-days, financial economics provide a number of models that helps to examine the relationship. Though most of the studies are fir the US, European countries and Japan, recently, post-Asian crisis, the literature has started focusing on emerging Asian markets as well. Quite a few papers address the issue of capital markets integration in emerging economies in the Asia-Pacific basin, with evidences of mixed results, depending on the methodology, data, time, period and/or framework used. Janak Raj and Sarat Dhal in their study estimated the extent to which the integration between Indian and other major stock markets of the world changed from March 1993 to endJanuary 2008. They suggested that the integration has strengthened in the more recent period since 2003. The empirical analysis used methods like correlation, unit-root test and Johansens multivariate VECM model to study the cointegration and checked the sensitivity of the results in an environment of structural shifts and external shocks. The data taken for the study were both daily and weekly indices values which were converted to US dollar as common currency value. Thus they concluded that Indias stock market provides opportunities for higher returns than other regional and global markets. Also, in terms of risk-adjusted return, the Indian market outperforms others. The US stock market is proven to have a significant influence on the Asia-Pacific markets and the integration is shown to have started after the stock market crash of 1987 and/or the Gulf War of 1991. B J Queensly Jeyanthi and Punithavathy Pandian (2008) focused on the emerging markets as there is an increase in funds flowing from the developed markets towards the developing markets, and therefore these markets are becoming important in terms of portfolio management. They studied the integration between eleven developing and developed countries using daily stock price indices from April 2000 to March 2007. Returns from the emerging markets are reasonable and a good hedge against the more mature American and European markets.

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An International Monetary Fund report (Purfield, Oura, Kramer, Jobst; 2007) examines growth in Asian markets which is accompanied by improved liquidity and diversity since early 1990s. It focuses on following three aspects. First, it examines price performance relative to other markets, and considers some possible drivers. Second, it looks at recent trends in volatility and the possible relationship with capital account liberalization. Third, it explores correlations with global and regional markets, to provide a perspective on the integration of Asian markets with other equity markets. Jing Chi, Ke Li and Martin Young (2006) examined the degree of financial integration that exists in East Asian equity markets using the International Capital Asset Pricing Model methodology. The main objective was to study the long-term integration employing monthly data. The study shows that the level of financial integration has improved during 1991 to 2005 and the markets are more integrated with Japans stock market than that of USA. It also shows that market shocks leads to an increased level of correlation between markets for some time following the shock. There are varied views on the role of the Asian financial crisis on the integration of the Asian markets. Some cointegration analyses show significant long-run relationship(s) between Asian markets before and during/after the crisis. Malay Bhattacharyya and Ashok Banerjee (2003) examined the existence (or absence) of integration among stock indices of 11 developed and emerging stock markets from three continents: Asia, Europe and America. The weekly index values were used from November, 1990 to December, 2001 to apply VECM model for cointegration. The study also explores causal relationships between indices using Granger causality. Results show that capital market indices from European countries and the USA are not Granger caused by any index. On the other hand, causality effects are much pronounced in Asian capital markets. The capital market in Hong Kong leads the other markets in Asia. The findings also show that Japan has no influence in the integration of markets both pre- and post-crisis.

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Researchers thus tend to claim that financial markets in the Asia Pacific region are neither well integrated nor completely segmented. Analysis of stock market linkages in these emerging markets suggests that international investors have enough opportunities for portfolio diversification by investing in most of the Pacific Basin countries. For the open economies, although the linkages have increased since the late 1990s, there is still room for long-term gains by investing in these markets, as these markets are not expected to move in perfect cohesion in the long term. For the semi-open economies, although long-term diversification benefits might be limited, certain transitory benefits may be reaped due to short-term volatilities in the prices [Phylaktis and Ravazzolo, 2002].

STOCK EXCHANGES AND INDICES

Bombay Stock Exchange BSE is the oldest stock exchange in Asia. It has the largest number of listed companies in the world with over 5,034 Indian companies and over 7700 scrips. Its equity market capitalization was US$1.63 trillion as of December 2010, making it the 4th largest stock exchange in Asia and the 8th largest in the world [2]. The BSE SENSEX (acronym of Sensitive Index) is a free-float market capitalizationweighted index of 30 blue-chip companies listed on Bombay Stock Exchange. These companies represent all the financial and industrial sectors of the Indian economy. SENSEX was first compiled in 1986 and the base year was taken as 1978-79. It consists of academicians, market participants, finance-journalists, fund-managers, Independent

Governing Board members, and Exchange administration.

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Following graph shows the price movements of the index between the years 2001 to 2010

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Korean Stock Exchange Korea Exchange (KRX) is the sole securities exchange operator in South Korea with 1,757 listed companies having a combined market capitalization of $1.1 trillion. The Korea Composite Stock Price Index or KOSPI is the representative stock market index of South Korea. KOSPI was launched in 1983 with the base value of 100 as of January 4, 1980. The new market capitalisation based index, replaced the Index based on 35 blue chip stocks of the KSE [2]. Following graph shows the price movements of the index between the years 2001 to 2010

Tokyo Stock Exchange

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It is the third largest stock exchange in the world by aggregate market capitalization of its listed companies. The Nikkei 225 is a stock market index for the (TSE) which is calculated by Nihon Keizai Shimbun (Nikkei) newspaper since 1950. It is the pulse for Japanese market. It was introduced on September 7, 1950 and follows price-weighted average method.

Following graph shows the price movements of the index between the years 2001 to 2010

Hong Kong Stock Exchange (SEHK) The HANGSENG Index is the main performance indicator of Hong Kong stock market. HSI was started on November 24, 1969, and constitutes 45 companies. It is currently maintained by Hang Seng Indexes Company Limited, which is a wholly owned subsidiary of Hang Seng Bank. It is a capitalisation-weighted stock market index. To be eligible for the index, a company must be defined as a local company by the SEHK and must have been listed for at least two years; the company must be among the top 90 per cent of the total market value of all ordinary shares and must be among the top 90 per cent of the total turnover on the SEHK.

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Indonesia Stock Exchange (IDX) It is a stock exchange based in Jakarta, Indonesia. It had 341 companies market capitalization of $269.9 billion, as of 28 June 2010. Two of the primary stock market indices used to measure and report value changes in representative stock groupings are the JSX Composite and the Jakarta Islamic Index (JII) [2].

Following graph shows the price movements of the index between the years 2001 to 2010

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METHODOLOGY
The data used in this study consists of weekly stock indices of the major stock exchanges: BSE Sensex (India), SSE Composite Index (China), Nikkei 225(Japan), Korea SE Composite (Korea), HangSeng (Hong Kong), and JKSE (Indonesia).

The data is obtained from Yahoo website www.financeyahoo.com and covers the period January 1, 2001 to December 31, 2010. The weekly indices values are taken, as opposed to daily indices, to avoid the problem of non-synchronous trading when daily indices are in use, as daily indices may be influenced by some thinly traded stocks. An erroneous representation of the true relationships among these markets may thus result if daily indices are used (Hung and Cheung, 1995). To examine the trend of interdependence between the developed and emerging markets over time, the stock indices from the sample are further sub-divided into three sub-periods: January 1, 2001 December 31, 2003(Period I), January 1, 2004 December 31, 2006 (Period II) and January 1, 2007 December 31, 2010(Period III). Objective: The study will shed a light on the degree of integration between BSE and other Asian stock markets in the given timeframe. The objectives are: To calculate correlation and causality between BSE and other stock markets To determine the nature of causal relationship that exists, i.e., unilateral or bilateral To analyze how the degree of integration changes with the time period, especially pre and post recession

Hypothesis of the study H0: There is no significant integration between the two stock market indices. H1: There is significant relation between the two stock market indices. Study Design a) Study Type: The study type is analytical, quantitative and historical. Analytical because facts and existing information is used for the analysis, quantitative as relationship is examined by expressing variables in measurable terms, historical as the historical information is used for analysis and interpretation. b) Study population: population is the indices of other major stock exchanges of Asia & 30 stocks of Bombay stock exchange.
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c) Sampling frame: Sampling Frame is the Indian stock market. d) Sample: Sample chosen is continuously compounded weekly closing values of BSE Sensex, SSE Composite Index, Nikkei 225, Korea SE Composite, HangSeng, and JKSE. e) Sampling technique: Deliberate sampling is used because only particular units are selected from the sampling frame. Such a selection is undertaken as these units represent the population in a better way and reflect better relationship with the other variable. f) Period of the study: The data covers the period January 1, 2001 to December 31, 2010.

Statistical Models

ented Dickey Fuller test and Phillips-Perron test to test the stationarity of the series.

STATISTICAL MODELS
Stationarity According to Engle and Granger, a time series is said to be stationary if displacement over time does not alter the characteristics of a series in a sense that probability distribution remains constant over time. In other words, the mean, variance and co-variance of the series should be constant over time. A nonstationary time series will have a time varying mean or a time varying variance or both or are autocorrelated.The degree of co-integration is closely related with stationary. A series is said to be integrated of order one [I (1)] if it has to be differentiated once before becoming stationary. Similarly, a series is of order two [I(2)] if it has to be differentiated twice before becoming stationary[4].

Theory of Stationarity Following are different ways of examining about whether a time series variable Xt is stationary or has a unit root

then X will be stationary. For this reason, series with unit root are often referred to as difference stationary series

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there is no autocorrelation [4]

Testing Stationarity In general, the procedure start with whether the variables Y in its level form is stationary. If the hypothesis is rejected, then the series is transformed into first difference of the variable and tested for stationarity. If first difference series is stationary, this implies that Y is I(1). 44 H0: Series has Unit root : Non Stationary H1: Series does not have Unit root : Stationary Unit Root Test [Dickey Fuller Test]: Dickey Fuller test involve estimating regression equation and carrying out the hypothesis test. The AR (1) process is. Yt = C + Yt-1+ t Where c and are parameters and is to be white noise. If -1 < < 1, then Y is stationary series. While if = 1, y is non stationary series. Therefore, why not simply regress Yt on its lagged value yt-1 and find out if the estimated is statistically equal to 1? If it is, then Yt is nonstationary. This is the general idea behind the unit root test of stationarity. yt = C + t-1 + t Where = (-1), and the null and alternative hypotheses are Ho: = 0 ..Non Stationary H1: < 0 ..Stationary Unit root test [Augmented dickey fuller test] Yt = C + t-1 + 1 yt-1 + 2 y t-2 + ..+ p yt-p + t This augmented specification is then tested H0: = 0 Non Stationary H1: < 0 Stationary The unit root test is based on the following three regression forms: 1. Without intercept and trend (random walk) Yt = Yt-1 + t 2. With intercept (random walk with drift) Yt = + Yt-1 +t 3. With intercept and trend (with drift around a stochastic trend) Yt = T + Yt-1 +t Where, is the intercept/constant
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T is trend is the slope i.e. level of dependency and integration is drift parameter i.e. Change from Yt to Yt-1 t is the error term. In general, the procedure start with whether the variables X and Y in its level form under none, intercept and trend and intercept are stationary. If the hypothesis is rejected, then the series is transformed into first difference of the variable and tested for stationarity. If first difference series is stationary, this implies that X and Y are I(1).[4] The Phillips-Perron Test Phillips and Perron have developed a more comprehensive theory of unit root nonstationarity. The tests are similar to ADF tests, but they incorporate an automatic correction to DF procedure to allow for autocorrelated residuals. The tests usually give same conclusions as ADF tests, and the calculation of test statistic is complex. Test of Cointegration ( Engle Granger Test) The test of Cointegration identifies the long run structural relationship among the variables under consideration. In other words, it tries to establish whether in the long run the variables under study would move in the same direction or not. The current study envisages to study whether the indexes under consideration move in the same direction in the long run or not. Consider two time series xt and yt, these two time series can be said to be cointegrated if: (a) both time series (xt and yt) are I (1) that is become stationary after first differencing, and (b) there is some linear combination of xt and yt that is I(0), that is stationary. In general for two I(1) variables, any linear combination among them, would be of the form: yt =bo+b1xt+ut or ut=yt-(bo+b1xt) For example, bo and b1take different values to become I(1). However, if xt and yt are linked together in a linear (long-term) relationship then one will find something unusual occurring, namely the second of the two conditions for the existence of cointegration will hold: there will be at least one linear combination of xt and yt that will be I(0), that is stationary. When this is the case, one can be certain that any correlation over time between xt and yt is not spurious. When the above conditions (a) and (b) hold, it is said that the time series xt and yt are cointegrated. Thus, cointegration is the statistical equivalent of the existence of a long18 | P a g e

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run economic relationship between I (1) variables. The meaning is that of existence of longrun equilibrium relationship. [4]

RESULTS AND ANALYSIS

CORRELATION It has been asserted that links between the global stock markets has increased with the improved electronic communication and abolition of exchange control over the prices. The spread of information just takes seconds, so the effect of the news can be seen on all the markets at the same time. As we can see that the help of correlation which is getting stronger and stronger in most of the cases on year on year basis, there is a significant relationship among the movement in the Sensex with the movements of other Asian markets. The exception is the Japan equity market (Nikkei) for which the lowest coefficients from the whole sample are found, a situation that is repeated when looking at the tranquil and crisis sub periods. The period 2001-03 clearly shows that very little correlation was existent among the exchanges. This signifies that the impact of other exchanges was negligible on the Indian capital markets. The capital market was slowly evolving at that point of time and India had only limited foreign exposure. 2004-06 reflects the time-period of convergence between the world markets. Many economies like Japan which were facing downturn were making a comeback. Our expectation to find high level of impact of other markets on Indian market gets validated as shown by very high correlation figures in the table. The period 2007-2010, characterized by the recession phase reduced the correlation between the markets and Sensex. However, Sensex is still correlated with Jkse, Hangseng, and Kospi, Nikkei does not have any correlation.

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The Hong Kong market is believed to be the most interactive and influential market in the Asian region. However, results revealed that Indian markets are highly influenced by KOSPI and JKSE. Correlation coefficients are slightly higher during the crisis period for all the markets than during the tranquil period. All Asian markets significantly responded to the recession thereby leading to high correlation. The Japanese market did not become much more influential after the crisis; therefore we infer that Japan is a relatively isolated market under normal market conditions. Also, Chinese stock market is not correlated post recession due to the limitations on inward foreign capital.

GRAPHS
The association between trends in other Asian markets and the Indian market, over various phases of ups and downs, is quite apparent from the graphical exposition [Graph 8-12] which depicts the movements of different market indices during the period January 2000 to Dec 2010.

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COINTEGRATION
In econometric analysis if two or more stock market price indices are found to be cointegrated, it implies that there is a long-run equilibrium relationship between them or that they will move very closely together over time. Again, if stock markets are perfectly integrated or are found to share a single common trend, it implies that any one market will be representative of the behaviour of that pair/group of markets. Hence the benefits of portfolio diversification, within the pair/group of countries, cease to exist over a reasonably long horizon. The possible long-term relationship of the Indian market with each of the other markets is analysed here. The outcomes [Table 10] indicate very clearly that the integration of Indian stock market with other Asian markets is increasing with the exception of HANGSENG. The growth of the world economy during 2002-07 exceeded that of 1990s due to acceleration in developing and emerging economies. This period witnessed a rapid expansion of international trade and capital flows. World exports of goods and services increased by 2.5 times and most Asian countries experienced double digit growth rates. There was high degree of price stability while inflation was around 4%. After the bursting of dot com bubble, the policy measures were taken in order to control deflation in advanced countries. Due to this, developed countries like Japan lowered their interest rates to zero. Low interest rates, high liquidity and stagnant equity prices triggered private capital flows towards developing countries for arbitrage gains. The net private capital flows to the emerging markets were $50billion in 2002 which rose to $620 billion in 2007. But exceptional capital gains on stocks increased spending on consumption and property which led to housing bubble. Stock market bubble was most marked in China, India, Indonesia and Korea where stock markets raised at a very high level, driven partly by domestic credit expansion and partly by foreign acquisition. But this led to another recession when the bubble burst causing downfall of the markets.

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From the perspective of the Indian market, the study of its degree of integration with other markets has implications for possible portfolio diversification by foreign investors, especially as foreign investors are believed to be the new drivers of the market. KOREA India is cointegrated with South Korea throughout the period. This can be attributed to the trade between the two countries which has increased exponentially, exemplified by the $530 million during the fiscal year of 19921993, and the $10 billion during 20062007[5]. It increased its trade with India during the 1997 Asian financial crisis. It has also signed a free trade agreement known as Comprehensive Economic Partnership Agreement (CEPA) to reduce the tariffs on imports and exports and ease restrictions on foreign direct investments. It is the fifth largest source of investment in India. KOSPI grew by 253% over the whole period and has negative rate of returns only during recession. JAPAN It shows cointegration from the period of 2004-2006 and post recession. Japans economy faced a period of recession in the last decade. It started to recover during the period 20042006 when the whole world market was growing. This can be seen while comparing rate of return of NIKKEI over different periods [Table 13]. It has positive rate of return of 57% between the period 2004-2006 only. With the growth of the Indian economy, India is a big market for Japanese firms. But Japan does not influence the Indian market during the time of crises. It shows no integration from 2001-2003 and during recession. This can be explained by the fact that India
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has been unable to attract the attention of Japanese multinational enterprises and benefit from the trade-FDI nexus as other countries have. Most of the Japanese companies face differences in business practices, environment and culture etc. A major obstacle to Japanese investment in India is its complicate and non-transparent financial system [6]. INDONESIA India regards Indonesia as a key member of ASEAN. Its abundance of natural resources and a flourishing manufacturing sector have ensured a successful relationship with the booming Indian economy in areas of trade and investment. This is also reflected in the results that Indian markets are cointegrated over the whole period. The rate of return of JKSE for the whole period is highest among all countries. It grew by 784.27% over the whole period. Many bilateral trade efforts have been made along with the investments by more than twenty Indian manufacturing giants in Indonesia. Thus there is a lot of influence of Indonesian market over India. The integration has increased after the recession of 2007. Even after the recession, it has recovered very fast and has the highest rate of return post recession. CHINA India is enjoying a positive balance of trade with China. But the results show no cointegration between the two markets. It can be mainly because of the difference in the political and economic policies of the countries. The governing factors of Chinese markets are entirely different from that of Indian markets. Chinese markets are relatively isolated and there are lot of restrictions on inward of foreign capital. The markets seem to be integrated since the recession period. But the rate of return of Shanghai is still negative after the recession. HONGKONG Hangseng was cointegrated with Sensex before the recession period. It has positive rate of return only in the period 2004-2006. Recession Period Contrary to initial hype of decoupling, Asian countries were severely affected by shocks of 2007 recession. Equity markets lost more than half of their values in 2008. There is a negative rate of return for all the markets. As the crisis deepened, resident outflows increased while non-resident inflows declined. Thus there is a very high correlation among all the markets with Sensex. But cointegration exists only with KOSPI, JKSE and SSE. Post Recession In all Asian economies, equity prices stood at much higher level at the end of the year 2009 than the beginning. In some cases like India and Indonesia, they were fully recovered from
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the losses. This is reflected in positive rate of return for all indices except SSE. Although correlation reduced, JKSE and KOSPI are still highly correlated with SENSEX. SSE and NIKKEI are negatively correlated. All markets are cointegrated except HANGSENG.

CONCLUSION
This study explores the relationship between Indian and Asian equity markets over a period when much of the Indian market movements are perceived to be induced by FIIs, who continually move funds across global markets in search of the best possible returns. By applying the unit root test we find that all stock prices are nonstationary, as a consequence they can be used in cointegration methodologies. It is found that post-Asian crisis and up to mid-2004, the Indian stock market did not function in relative isolation from the rest of Asia and was highly correlated with stock markets of Korea and Indonesia. Despite existing restrictions on capital flows, the results suggest a strengthening of the integration of Indias stock market with global and regional markets. This is also proved by Granger causality that reflects a bidirectional relationship with most of the markets. The results also indicate varying degree of cointegrating relationships between the indices. Sensex is integrated with Jkse and Kospi over the whole time period while that with Nikkei and Sse takes place only post recession. Hangseng was cointegrated with Sensex before recession period. Consequently there is a sufficient room for portfolio diversification. An important new finding is that the crisis not only led markets affected by the crisis to be more integrated with each other but also caused them to be more responsive to the outside world.

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REFERENCES
[1] Financial portal, Retrieved OCT 28th, 2011 from, http://www.moneycontrol.com [2] Wikipedia, Retrieved April 20th, 2011 from http://www.wikipedia.org/ [3] Sadhan Kumar Chattopadhyay and Samir Ranjan Behera, Financial Integration for Indian Stock Market, Retrieved from EBSCO [4] Gujarati: Basic Econometrics, Fourth Edition, The McGrawHill Companies, 2004, pp.792-824 [5] Suchismita Bose (2005), Indian, US and Asian Stock Markets: Recent Trends in Interlinkages, Retrieved from EBSCO [6] Yilmaz Akyuz (2009), the Global Economic Crisis and Asian Developing Countries: Impact, Policy Response and Medium-Term Prospects, Retrieved from Third World Network [7] EViews 6 Users Guide I, pp 410-411

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