Causality Analysis of USA Stock Market over Indian Stock Market

Abstract

Since last few decades there have been a number of observations indicating the possibility that the behaviour of American stock exchange may have a significant influence on the behaviour of Indian stock market. The present work is an effort in this direction and the purpose of the present work is to measure connectedness of prime stock  exchange indices of India viz. SENSEX and NIFTY separately with the prime American stock exchange index viz. DOW JONES. To analyze  connectedness, we have used Correlation of Probability of Recurrence (CPR) method which is based on Recurrence Plot. We have examined CPR for 150 points, 250 points and 350 points window and we have compared the results with Pearson’s cross-correlation coefficient  . It has been observed that the markets move in and move out of periods of strong connectivity instead of moving monotonously towards increasing global connectivity as deduced by  . We have also performed Granger Causality Analysis of SENSEX and NIFTY separately with DOW JONES
and also separately with some other emerging Asian Stock exchanges like HANG-SENG, NIKKEI, FTSE ALL SHARE, STRAIGHT TIMES
INDEX, KOSPI COMPOSITE INDEX and TSEC WEIGHTED INDEX. It has been observed that DOW JONES Granger causes both SENSEX
and NIFTY more than any other prime Asian Stock Market Indices and effect of Granger causality increases in the windows where both the time series are strongly connected.