04-08-2012, 04:00 PM
theoretical background of the study
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INTRODUCTION
National stock markets have emerged as the major channel for financial integration of emerging market economies with globalization, deregulation and advances in information technology. Among the factors contributing to growing financial integration are, a rapid increase in the cross-border mobility of private capital inflows due to investors seeking portfolio diversification and better yields, a growing reliance of nations on the savings of other nations, and a shift in the leverage preference of companies from debt to equity finance. It is generally perceived that financial integration can be associated with several benefits, including development of markets and institutions and effective price discovery, leading to higher savings, investment and economic progress. At the same time, linkages among financial markets can pose various risks, such as the contagion and associated disruption of economic activities that were evident during the crisis in Asia in the late 1990s. More recently, in January 2008, national stock markets declined sharply in the wake of credit market developments in the United States. Economists have thus realized that it is useful for countries to monitor the progress of interdependence among financial markets for the sake of policy as well as market participants.
The knowledge of the relationship between international stock markets is of interest to a wide range of people. Individual investors are interested in the co- movement relationships of international share prices and the underlying common factors for possible diversification motives. Other interested parties included economists, corporate planners, and the like who are concerned with the structural behavior of international equity markets because it influences capital flows, investment decisions and consumption patterns. Academics would also be interested in seeing new evidence of structural issues such as integration, segmentation and efficiency of international equity markets.
The Indian stock exchanges hold a place of prominence not only in Asia but also at the global stage. The Bombay Stock Exchange (BSE) is one of the oldest exchanges across the world, while the National Stock Exchange (NSE) is among the best in terms of sophistication and advancement of technology. The Indian stock market scene really picked up after the opening up of the economy in the early nineties. The whole of nineties were used to experiment and fine tune an efficient and effective system. The ‘badla’ system was stopped to control unnecessary volatility while the derivatives segment started as late as 2000. The corporate governance rules were gradually put in place which initiated the process of bringing the listed companies at a uniform level. On the global scale, the economic environment started taking paradigm shift with the ‘dot com bubble burst’, 9/11, and soaring oil prices. The slowdown in the US economy and interest rate tightening made the equation more complex. However after 2000 riding on a robust growth and a maturing economy and relaxed regulations, outside investors- institutional and others got more scope to operate. This opening up of the system led to increased integration with heightened cross-border flow of capital, with India emerging as an investment ‘hot spot’ resulting in our stock exchanges being impacted by global cues like never before.
The study pertains to comparative analysis of the Indian Stock Market with respect to various international counterparts. Exchanges are now crossing national boundaries to extend their service areas and this has led to cross-border integration. Also, exchanges have begun to offer cross-border trading to facilitate overseas investment options for investors. This not only increased the appeal of the exchange for investors but also attracts more volume. Exchanges regularly solicit companies outside their home territory and encourage them to list on their exchange and global competition has put pressure on corporations to seek capital outside their home country.
Securities market in India has grown exponentially as measured in terms of amount raised from the market, the number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover of stock exchanges and investor population. Along with this, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements inefficiency, transparency and safety.
The Indian stock market is the world third largest stock market on the basis of investor base and has a collective pool of about 20 million investors. There are over 9,000 companies listed on the stock exchanges of the country. As regards transaction cost, the Indian stock market compares with some of the developed and regional economies. With the objective of internationalization, several Indian companies have opted for listing on the stock exchanges of other countries, especially the United States and the United Kingdom. Ten major Indian companies listed on the New York Stock Exchange (NYSE) account for a 19 per cent weight in the benchmark 30-scrip stock price index of the BSE. Fifty Indian companies are listed on the London Stock Exchange. Foreign capital flows have made a crucial contribution to the growth of India’s stock market. India has become a major destination, representing about a fourth of total portfolio capital inflows to the emerging market economies (EMEs) group. There are 1,247 foreign institutional investors participating in India’s stock market1. The purchase and sales activities of such investors account for three fourths of the average daily turnover in India’s stock market. Since foreign investors operate in a number of countries at the same time, their operations can be expected to have contributed to the integration of the Indian stock market with other markets. Moreover, India has engaged in various bilateral trade and economic cooperation agreements with several countries like BRIC and regional groups across Asia, Europe and the western hemisphere.
THEORETICAL BACKGROUND OF THE STUDY
CAPITAL MARKET:
Capital market is where people buy and sell financial instruments be it equity or debt. It is a mechanism to facilitate the exchange of financial assets.
Overview of Various stock exchanges and their main Indices:
In this analysis, the names of the countries and the names of the indices of those countries have been used interchangeably. Thus, the names of the countries represent the indices for the purpose of analysis and they need to be interpreted that way. Again, all the analyses have been done with the closing prices. The following table gives the country and the exchange with the name of its indices.
"RUSSIAN TRADING SYSTEM" STOCK EXCHANGE:
Established in 1995, as the first regulated stock market in Russia, RTS Stock Exchange now trades the full range of financial instruments from cash equities to commodity futures.
The RTS Index (RTSI) is an index of 50 Russian stocks that trade on the RTS Stock Exchange in Moscow. The list of stocks is reviewed every 3 months by the RTS Information Committee1.
The index value is calculated in a real-time mode. The index was first calculated on 1st September, 1995 with a base value of 100, has since become the main benchmark for the Russian securities industry and is based on the Exchange’s 50 most liquid and capitalized shares.
RTS — is a technologically advanced stock exchange, a fully transparent public institution, the driving force behind Russian stock market development. RTS Stock Exchange trading services meet the most demanding requirements of market participants. One of the top-priority areas of development for the RTS Stock Exchange is the introduction of new products and services for the stock market participants’ fast growing businesses1.