cointegration of NSE with other stock exchanges

Sunday, March 21, 2010

Does a stock  exchange in one country is related to exchanges in other countries?

On a purely statistical term ,return on one exchange over a certain span of time can be regressed with other to find out the co-relation between them. This  can be done graphically also, where we can draw the return over a period of time after selecting a basis.

Formula for Daily return =  log (P i  / P i-1)   where

P i = Stock price at  ith day
P i-1= Stock price at  i-1 th day

Using the above formula the return I regressed Nifty 50 with  Hang seng Index, Nikkei 225, Straits Times, S&P 500  for last 5 yrs  and the co-relation coeff. were found to be as:

Hang seng Index =  0.22
Nikkei 225             = -0.04
Straits Times        = 0.20
S&P 500       =-0.10

Nifty- Hang seng Index

Nifty-Nikkei 225

Nifty- Straits Times Index

Nifty-S&P 500 Index
Although in graphical term it seems that hang seng Index  and Straits Times Index is more co-related with Nifty than waht it comes out from regression analysis. It can be attributed to the delay in movements of important market sentiments. Index movement based on any event also depends upon the composition of index. So,every index takes its own time to adjust according to the news.

S&P 500 still drives the indices around the globe on broader term but on daily basis its not.The lower co-relation between S&P 500  and  Nifty 50  can be used for diversification purpose in portfolio and a higher corelation can be used for hedging purpose. so, Hang seng Index can be used to hedge portfolio on nifty. Also, daily watch on Hang seng  and Strais Times Index gives a cue to opening of Nifty in early starts.


Post a Comment

Back to TOP