An examination of co-movements of India's stock and government bond markets

We examine the dynamics of India's stock and government bond markets, and their interrelationships with stock markets of the U.S., U.K., Japan, China, and Emerging Equity Markets using multivariate cointegration tests. We find that India's stock and bond markets share two cointegrating vectors with the five foreign equity markets, suggesting full integration is far from complete. Further, India's stock and bond markets share one cointegrating vector, indicating the two markets are tied together by one long-run cointegrating relationship. We estimate dynamic conditional correlations between India's stock and bond returns, and find that unconditional and constant conditional correlations understate dynamic conditional correlations, implying greater ex-ante diversification benefits from combining India's stocks and bonds in one portfolio. We are able to explain a good portion of the variability in estimated dynamic conditional correlations using many of the conditioning variables used to explain temporal variations of India's expected stock and bond returns. (C) 2015 Elsevier Inc. All rights reserved.