How linkages fuel dependent economic policy initiatives: Empirical evidence from US and Indian financial stress indices

Singh, Amanjot and Singh, M 2017, How linkages fuel dependent economic policy initiatives: Empirical evidence from US and Indian financial stress indices, International Journal of Law and Management, vol. 59, no. 2, pp. 303-318, doi: 10.1108/IJLMA-01-2016-0007.

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Title How linkages fuel dependent economic policy initiatives: Empirical evidence from US and Indian financial stress indices
Author(s) Singh, AmanjotORCID iD for Singh, Amanjot
Singh, M
Journal name International Journal of Law and Management
Volume number 59
Issue number 2
Start page 303
End page 318
Total pages 16
Publisher Emerald Publishing Group
Place of publication Bingley, Eng.
Publication date 2017
ISSN 1754-243X
Keyword(s) India
Financial stress
Summary Purpose With the globalization and liberalization in terms of increasing financial flows across the countries, the policy makers around the world are not independent in the context of monetary and fiscal policy initiatives. In this regard, this paper aims to attempt to quantify and capture long run, short run as well as time-varying linkages among the two financial stress indices, namely, Kansas City Financial Stress Index (KCFSI) and Indian Financial Stress Index (IFSI) across the monthly period (2004 to 2014).Design/methodology/approachOwing to the non-existence of a standardized financial stress index with regards to the Indian financial system, the study has developed an index/stress indicator using principal component analysis. Furthermore, to comprehend the linkages, the study uses bivariate Johansen cointegration model, vector error correction model, impulse response functions (IRF), variance decomposition analysis (VDA), Toda-Yamamoto’s Granger causality test and, finally, bivariate generalized autoregressive conditional heteroskedastic (BVGARCH) (1,1) model under constant conditional correlation (CCC) framework.FindingsThe results report a stochastic trend among the two indices wherein the US financial system acts as a source of a shock causing disequilibrium in the long run co-movement. About 40 per cent of the adjustments take place in one month and rest in the coming months. Both the IRF and VDA report a greater degree impact of the US financial stress on the Indian financial system. Moreover, there is a uni-directional short run causality running from the stress in the US financial system to the Indian financial stress. Furthermore, the co-movement between the US and Indian financial stress reached to its maximum significant level during the sub-prime crisis even confirmed by the Markov switching model results.Practical implicationsOverall, the results provide an insight to the financial market investors both domestic as well as international in their act of risk management. The financial stress prevailing in an economy further has an impact on different economic factors like foreign exchange rates, interest rates, yield curves, equity market returns and volatility. So, the empirical results support strong implications for the Indian policy makers as well as investors in the Indian financial markets.Originality/valueThe present study contributes to the literature in three senses. First, the study considers indices reflecting financial stress in the Indian as well as US financial system. Second, the study captures long run as well as short run linkages among the financial stress indices relating to a developed and an emerging market. Finally, the study uses CCC-BVGARCH (1,1) model to account for the time-varying co-movement among the financial stress indices. This helps in comprehending time-varying nature of the co-movement of the stress in the financial system prevalent in the respective markets.
Language eng
DOI 10.1108/IJLMA-01-2016-0007
Indigenous content off
Field of Research 15 Commerce, Management, Tourism and Services
18 Law and Legal Studies
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
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Document type: Journal Article
Collections: Faculty of Business and Law
Department of Finance
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