Study of Long-Run and Short-Run Relationship among the Nifty Large Cap, Mid Cap and Small Cap Stock Indices of NSE

Abstract

The inter connection between capital market indices are increasing over the year. A stock market is defined to be an efficient market when stock prices reflect simultaneously the new information appears in the market and, therefore, the current prices of stock reflect all traded and publicly available information about the stock. Recent research reveals that there are long term relationships between stock markets of different nations. Studies have also been done on the cointegration of stock indices within country. In this study we have try to investigate the cointegration among the three major Nifty broad Indices of India Nifty 50, Nifty Mid Cap 50 and Nifty Small Cap 50. All these indices have different market capitalisation and constitutes by different kind of shares. Here I have taken daily closing data of these indices from 1^st January, 2012 and ending on 31^st December, 2016. We have used test of stationarity for presence of unit root or auto-correlation and Johansen Cointegration test to examine the presence cointegration among the indices. For short run causality we have applied unrestricted VAR model. The result confirms that there are no cointegrating relationships between the three indices. However, the VAR model indicates that there is short run causality in return between those indices.