INTEGRATION & CORRELATION BETWEEN STOCK MARKETS

Abstract

With never exhausting innovations in communications and information technology, the stock exchanges all over the world are closely interlinked and no stock exchange can be immune to external influences. Stock markets integration provides certain benefits to individual investors as well as to the overall stock markets. Not only the closely related markets are integrated but the less correlated markets are also sometimes integrated. If the stock markets which are less correlated are integrated then it provides the diversification benefits. Coefficient of Correlation is used to measure the strength of association between two variables. A recent major development in international finance has been the growing interest of the portfolio managers in emerging stock markets. The interest in the emerging markets has been accelerated by global trends towards the opening up of the economies and financial markets, the free flow of the capital and the privatization of financial institutions. The fraction of the United States portfolio that is allocated to foreign equity investment, the share invested in emerging stock is roughly proportional to the share of the emerging stock markets in the global market capitalization value. The volatility of the United States transactions in emerging markets equities is higher than in other foreign equities. In past several years the opportunities of equity investment in developing economies have increased remarkably. The expansion of local equity markets and the development of instruments for issuing equity directly on international markets have given firms in these economies the access to the world supply of capital. The study helps to provide an opportunity to find out the factors that effect the correlation between stock markets especially between a developing and a developed market inorder to reduce the overall risk.