Unveiling the Dynamics of Indian Stock Market Integration with Global Trading Partners: Insights through Impulse Response Analysis

Abstract

Purpose: The purpose of this study is to look into the integration of the Indian stock market with the stock markets of its major trading partners, with a focus on the dynamic relationships and spillover effects between India and six key global partners (Korea, China, Germany, Belgium, the UK, and Switzerland) from 2002 to 2021.

Design/Methodology/Approach: The study uses a Vector Autoregression (VAR) framework with Impulse Response Functions (IRFs) to examine daily log returns of stock indices. This approach captures how shocks in one market influence another over time, allowing for the examination of market integration and financial contagion.

Findings: The findings demonstrate substantial trends in financial contagion, suggesting that shocks originating in India's trading partners' stock markets significantly affect the Indian stock market, and vice versa. It reflects that world’ financial markets are growingly becoming more integrated, especially with regard to developing nations like India.

Originality: This study adds to the growing literature on stock market integration by conducting a thorough examination of the Indian market's connection with its important worldwide partners. Studies on market interdependence are enhanced by the application of IRFs and the VAR framework, which provides a deeper knowledge of how global market dynamics impact emerging economies like India.

Practical Implications: The findings have major significance for policymakers and investors, particularly in terms of understanding how global market volatility affect the Indian economy. These understandings can direct economic policies and investment plans that take into consideration the interdependence of international financial institutions