Indian Stock Market and its Dependency on US Stock Market

The Indian stock market dependency can be well noticed through collapse of the financial giants like AIG, Lehman Brothers and Merrillynch on Wall Street followed by the largest banks namely Washington Mutual and Wachovia which has created shock waves across the global financial markets.

US government has declared the bailout package to absorb these shock waves but the feelings and emotions have travelled around the world and leading to a of slow down in the economy and reaching the stage of recession. At the same time, Indian liquidity was almost drying up because of the low demand in industrial production. GDP growth was estimated at a lower percentage than the earlier (8.5%-7%) and even FII's were pulling their investments out of Indian stock market, which increased the difficulty in raising money for new ventures through IPO's.

So the above situation states that US stock market is correlated with the indices of Indian stock market and to avoid spill over and improve the market functioning, it necessitates a study of the dependency/independence of the stock indices between the two nations. This paper attempts to determine the dependent stock market factors of India with that of the US.

Through Multiple Correlation Analysis, the level of relationship between the two stock markets will be established.Through Multiple Regression Analysis, the dependency level is measured. A hypothesis is also stated and applied to know the intensity of the dependency between the Indian and the US stock markets.