A Comparative Interrelationship Study of Indian … Comparative Interrelationship Study of Indian...

www.indiastat.com October – November, 2016 1 socio - economic voices

A Comparative Interrelationship Study of Indian Stock Market with Global Stock Markets

(Dr. Anubha Srivastava, Assistant Professor (Finance), Amity Business School, AUUP, Noida)

Introduction 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 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. (Gupta, 2011) 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. 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. The Bombay

Stock Exchange, established in 1875, is the oldest in Asia. National Stock Exchange, a more recent establishment

which came into existence in 1992, is the largest and most advanced stock market in India is also the third biggest

stock exchange in Asia in terms of transactions. It is among the 5 biggest stock exchanges in the world in terms of

transactions volume. (Joshi) The following table gives the country and the exchange with the name of its indices.

COUNTRY STOCK EXCHANGE INDICES NAME India National Stock Exchange S&P Nifty India Bombay Stock Exchange Sensex

Hong kong Hong Kong Stock Exchange Hang Seng USA New York Stock Exchange NYSE

Korea Korean Stock Exchange KRX 100 Russia Russian Stock Exchange RTS Index Tokyo Tokyo Stock Exchange TOPIX

Table -1


Presently, the fluctuations in the Indian market are attributed heavily to cross border capital flows in the form of FDI,

FII and to reaction of Indian market to global market cues. In this context, understanding the relationship and

influence of various exchanges on each other is very important. This study compares global exchanges which are

from different geo politico- socio-economic areas. With the cross border movements of capital like never before in

the form of FDI and FII, coupled with the easing of restrictions bringing various stock exchanges at par in terms of

system and regulations, it can be assumed reasonably that a particular stock exchange will have some impact on

other exchanges. (Ghosh, 2004) Literature Review Poshakwale, Sunil (2002) examined the random walk hypothesis in the emerging Indian stock market by testing

for the nonlinear dependence using a large disaggregated daily data from the Indian stock market. He found that

the daily returns from the Indian market do not conform to a random walk. Daily returns from most individual stocks

and the equally weighted portfolio exhibit significant non-linear dependence. Noor, Azuddin Yakob, Diana Beal and Delpachitra, Sarath (2006 )studied the stock market seasonality in terms of day-of-the-week, month-of-the

year, monthly and holiday effects in ten Asian stock markets, namely, Australia, China, Hong Kong, Japan, India,

Indonesia, Malaysia, Singapore, South Korea and Taiwan. He concluded that the existence of seasonality in stock

markets and also suggested that this is a global phenomenon. Masih, M.M. Abul and Masih, Rumi (1997)

examined the dynamic linkage patterns among National stock exchange prices of four Asian newly industrializing

countries like Taiwan, South Korea, Singapore and Hong Kong. They concluded that the study of these markets is

not mutually exclusive of each other and significant short run linkages appear to run among them. Harvey (1995) found that serial correlation in emerging market returns are much higher than observed in developed markets. He

argued that lack of diversification and trading depths in emerging markets are primarily responsible for such serial

correlation pattern. In a similar study by Bae, K, Cha, B, and Cheung, Y (1999) the researchers tried to show the

information transmission mechanism that operates for stocks which are dually listed. This has helped in

understanding the channel of transmission of information that makes the exchanges dependant on each other. Agarwal, R N (2000) examined the financial integration of capital markets in developing nations gave insight with

regards to the methodology and the area of study followed. Li et al. (2005) examined the relationship between

expected stock return and volatility based on parametric EGARCH- M model. They found a positive but insignificant

relationship between stock return and volatility. By using semi parametric specification of conditional variance, they

found a significant negative relationship between expected return and volatility in six out of 12 markets during January 1980 to December 2001. Mukherjee and Bose (2008) investigated the level of market integration of India

with the developed countries of US, Japan and five other Asia Pacific markets for the period between1999 to

2005.They found that Stock returns in India were led by major stock index returns in US, Japan, Hong Kong, South

Korea and Singapore. Pandey and Kumar (2008) found co movement of Indian markets with eight other key stock


exchanges in Asia for the period from 2000 to 2008.Theyfound that the period was marked with high volatility

among all markets under study. Kumar and Dhankar (2009) examine the cross correlations in stock returns of

India with Pakistan and Bangladesh for a period between 1997 and 2007. They tested the asymmetric volatility and

relationship of stock returns with expected and unexpected volatility. They found weak correlation between the

stock returns and significant relationship between stock returns and unexpected volatility, suggesting that investors

realize extra risk premium for taking advantage of unexpected variations in stock returns.

Research Methodology

a) Objectives of Study 1. To find out comparative Qualitative significant differences among all stock indices.

2. To find out an extent of interrelationship through Correlation among all the stock exchanges.

3. To do a comparative study of the trends and movements of various stock exchanges.

4. To do a comparative Risk and Return analysis of all stock exchanges.

b) Research Design

This kind of research type is used in which information is being collected without changing the environment

which means that nothing is manipulated. In the qualitative research analysis, data for 5 countries is being

considered including India, USA, Korea, Hong kong and Japan for the study. Whereas, for the quantitative

research analysis, data for 5 countries including India, USA, Korea, Hong kong and Russia is being taken into

consideration for the time period of 10 years i.e., from 1st Jan,2003 to 31st Dec,2013. To do the detailed

comparative analysis of Indian stock markets with international markets only secondary data is being used and

collected from the below mentioned sources i.e. websites , research journals newspaper etc.

c) Tools and Techniques

To study the impact of various stock exchanges following statistical tools are being used in order to depict the

relationships, trends and movements of the stock exchanges:

Correlation Analysis Exponential Trend Analysis Risk-Return Analysis

Result & Discussion

This is the main part of the study wherein the various stock exchanges of the sample have been compared on

certain parameters, both qualitatively and quantitatively.


A) Qualitative Analysis- In this section the various stock exchanges have been compared on the following parameters;

1. Market Capitalization 2. Number of listed securities 3. Listing agreements 4. Circuit filters 5. Settlement

1- Market Capitalization- The table below shows the market capitalization of various stock markets in the world.

S.No Country Market Cap (US $ Billions) % of world 1 USA 17 949 883.8 30.03 4 Hong kong 3 100 777.2 5.19

2 India 2251786.3 3.77 3 Korea 1 234 548.5 2.07 5 Russia 770 656.6 1.29 6 Others 57526742 57.65 Total 59 778 527.8 100

Table-2: Source: World Federation of Exchanges It can be observed America region is the emerged economy, in which NYSE is having the highest share among

other stock exchanges. NYSE Euronext is having a share of 30% to the world which is very dominating, followed by

NASDAQ OMX which is having around 10% market share in the world in terms of Market capitalization. It is

interesting to note that the total market capitalization of all the companies listed on the New York Stock Exchange is

greater than the amount of money in the United States in Asia Pacific region, Japan Stock Exchange is leading with

around 7.50% share among the world. Followed by the Hong Kong Stock Exchange ranging to around early 5%

share in the world, interestingly Asia’s oldest stock exchange, BSE is having only 1.91% market share and NSE is

1.86%.

2- Listed Securities-India has the highest number of companies listed in the stock market. Out of this, about 75%

of the companies are listed with the Bombay Stock Exchange. After India, United States has the highest number of

companies listed.


Figure -1: Source: World Federation of Exchanges Indices

Parameters BSE NSE NYSE Tokyo Stock Exchange

Hong Kong Stock Exchange

Korea Stock Exchange

Name SENSEX NIFTY Dow Jones Industrial

NIKKEI-225 Hang Seng KOSPI

No. of Companies

30 50 30 225 33 200

Method of calculation

Free-float market capitalization method

Weighted Average

Weighted Average Method

Average Price Weighted

Free-float Weighted Capitalisation Stock Market Method

Weighted Market Capitalisation Method

Table -3: Source: Stock Exchanges Websites 3-Listing Agreements: Bombay Stock Exchange: The following eligibility criteria have been prescribed for listing of companies on BSE,

through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs): Minimum Listing Requirements for

New Companies:

Categories IPO FPO Minimum post-issue paid-up capital Rs. 10 crore Rs.3 crore Minimum issue size Rs. 10 crore Rs. 10 crore Minimum market Capitalization Rs. 25 crore Rs. 25 crore

Table -4


National Stock Exchange: Qualifications for listing Initial Public Offerings (IPO) are as below:

Paid up Capital: The paid up equity capital of the applicant shall not be less than 10 crores and the

capitalisation of the applicant's equity shall not be less than 25 crores.

The Issuer shall have adhered to conditions precedent to listing as emerging from inter-alia from Securities

Contracts (Regulations) Act 1956, Companies Act 1956, Securities and Exchange Board of India Act 1992,

any rules and/or regulations framed under foregoing statutes, as also any circular, clarifications, guidelines

issued by the appropriate authority under foregoing statutes.

At least three years track record:

1. The company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).

2. The net worth of the company has not been wiped out by the accumulated losses resulting in a negative net

worth.

3. The company has not received any winding up petition accepted by a court.

4. ‘Promoters’ mean one or more persons with a minimum 3 years’ experience of each of them in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally

5. No disciplinary action by other stock exchanges and regulatory authorities in past three years.

New York Stock Exchange- Domestic listing requirements call for minimum distribution of a company's shares

within the United States, conditions are:

The number of beneficial holders of stock held in "street name" will be considered in addition to the holders

of record. The Exchange will make any necessary check of such holdings that are in the name of Exchange

member organizations.

In connection with initial public offerings, spin-offs and carve-outs the NYSE will accept an undertaking from

the company's underwriter to ensure that the offering will meet or exceed the NYSE's standards.

Distribution & Size Criteria:

Round-lot Holders (a) 400 U.S. Public Shares (b) 1,100,000 outstanding Market Value of Public Shares (b,c) $40 million IPOs, Spin-offs, Carve-outs, Affiliates $100 million

Table- 5


Stock Price Criteria: All issuers must have a $4 stock price at the time of listing Financial Criteria:

Earnings Test Aggregate pre-tax income for the last 3 years $10 million Minimum in the most recent year $2 million

Minimum in the next most recent year $2 million

Valuation with Cash Flow Global Market Capitalization $500 million

Revenues (most recent 12-month period) $100 million

Adjusted Cash Flow: Aggregate for the last 3 years

$25 million

Pure Valuation with Revenues

Global Market Capitalization $750 million

Revenues (most recent fiscal year) $75 million

Affiliated Company Global Market Capitalization $500 million

Operating History 12 months

Assets and Equity Global Market Capitalization $150 million

Total Assets $75 million

Stockholders' Equity $50 million

REITs

Stockholders' Equity $60 million

Funds and BDCs Net Assets $60 million

Table- 6

If a company either has a significant concentration of stock or changing market forces have adversely

impacted the public market value of a company that otherwise would qualify for an Exchange listing, such

that its public market value is no more than 10% below the minimum, the Exchange will consider

stockholders' equity of $60 million or $100 million, as applicable, as an alternate measure of size.


Pre-tax income is adjusted for various items as defined in Section 102.01C of the NYSE Listed Company Manual

Represents net cash provided by operating activities excluding the changes in working capital or in

operating assets and liabilities, as adjusted for various items as defined in Section 102.01C of the NYSE

Listed Company Manual.

Global market capitalization for already existing public companies is represented by the most recent three

months of trading history in the case of Pure Valuation with Revenues. For all other standards, the

measurement is "point in time" for existing public companies. For IPOs, spin-offs and carve-outs, it is

represented by the valuation of the company as represented by, in the case of a spin-off, the distribution

ratio as priced, or, in the case of an IPO/carve-out, the as-priced offering in relation to the total company's

capitalization

Tokyo Stock Exchange: Criteria for listing are as under: Criteria Securities Listing Regulations

(Formal Requirement) (1) Number of shareholders （As of the listing day）

800 or more (or 2,200 or more)

(2) Tradable shares （As of the listing day）

a. The number of tradable shares: 4,000 units or more (or 20,000 units or more) b. The market capitalization of the tradable shares: 1 billion yen or more c. The number of tradable shares: 30% or more of the listed stocks, etc. (or 35% or more)

(3) Market capitalization （As of the listing day）

2 billion yen or more (or 25 billion yen or more)

(4) Number of consecutive years of conducting business

The business activities have been continuously carried out by setting up a board of directors since a day before the day which is three years prior to the end of a business year immediately prior to the business year containing the initial listing application day

(5) Amount of net assets （As of the listing day）

1 billion yen or more

(6) Amount of profits and market capitalization (a. or b. must be satisfied)

a. The total amount of profits in the last two years shall be at least 500 million yen; b. The market capitalization as of the listing day is expected to reach at least 50 billion yen, except cases where sales for the last year are less than 10 billion yen

(7) False statement or adverse opinion, etc. (a. through d. must be satisfied)

a. No false statement is made in the securities reports, etc. which contain or make reference to financial statements, etc. for each business year or each consolidated accounting year which ended in the last two years or quarterly financial statements, etc. for a quarterly accounting period in each business year or for a consolidated quarterly accounting period in each consolidated accounting year; b. The audit report attached to financial statements, etc. for each business year or each


consolidated accounting year which ended in the last two years contains an "unqualified opinion" or a "qualified opinion with exceptions" of certified public accountants, etc.; provided; c. The audit report attached to financial statements, etc. for the business year and consolidated accounting year which ended in the last year and a quarterly review report attached to quarterly financial statements, etc. for a quarterly accounting period in the business year which ended in the last year and a consolidated quarterly accounting period in the consolidated accounting year contain an "unqualified opinion" or an "unqualified conclusion" of certified public accountants, etc.; provided; d. Where a stock, etc. pertaining to an initial listing applicant is listed on any other financial instruments exchange in Japan, such stock, etc. shall not fall under the following (a) and (b): (a) The internal control report pertaining to the business year ending in the last year contains the fact that "appraisal results cannot be provided" contained in; (b) The internal control audit report regarding the internal control report pertaining toa business year ending in the last year contains the fact that "no opinion is provided".

(8) Audit by a listed company audit firm

The financial statements, etc. for each business year or consolidated accounting year ending in the last two years as well as the quarterly financial statements, etc. for a quarterly accounting period in the business year or for a quarterly consolidated accounting period in the consolidated accounting year ending in the last year have undergone audit or quarterly review equivalent to that in the provisions of Article 193-2 of the Act by a listed company audit firm

(9) Establishment of a shareholder services agent

Shareholder services have been entrusted to an institution specified as the applicant’s shareholder services agent, or an informal consent of undertaking the entrustment of such shareholder services from the shareholder services agent has been received; provided, however, that the same shall not apply to a shareholder services agent approved by the Exchange

(10) Share Unit The Share Unit shall be expected to be 100 shares (11) Classes of stock In the case that a stock, etc. pertaining to the initial listing application, such stock, etc.

shall be, as a general rule, any of stocks referenced in the following a. through c. In this case, the initial listing applicant for the stock referenced in b. shall not have securities other than said stock as to which the applicant makes initial listing application a. In the case of a company issuing one class of stock with voting rights, said stock with voting rights; b. In the case of a company issuing multiple classes of stock with voting rights, a class of stock with voting rights whose value of rights, etc. to receive economic benefits including claim for surplus dividend pertaining to the number of shares that enables exercise of one voting right at a general shareholders meeting with regard to important matters including selection and dismissal of board members is higher than any other class of stock; c. Stock with no voting rights

(12) Restriction on transfer of shares

Transfer of shares pertaining to an initial listing application is not restricted or it is expected that there will be no restriction by the time of listing; provided, however, that the same shall not apply to cases where transfer of shares is restricted pursuant to the


provisions of special laws at the same time the details of the restriction are deemed not to hinder trading in the market of the Exchange

(13) Handling by the designated book-entry transfer institution

The relevant issue is subject to the book-entry transfer operation of the designated book-entry transfer institution, or is likely to be so by the time of listing

(14) Expected implementation of merger, etc.

The merger, etc. shall not fall under the following a. and b.: a. Where a merger, demerger, making other company a subsidiary or making a subsidiary a non-subsidiary or transfer of a business to or from other entity is scheduled to be carried out on or after the initial listing application day and within two years from the end of the most recent business year before such day, and, in addition, where the Exchange deems that an initial listing applicant will cease to be a substantial surviving company by such an act; provided; b. Where a merger in which an initial listing applicant becomes a dissolution company, a stock swap or a stock transfer whereby it becomes a wholly-owned subsidiary of another company is expected to be carried out within two years from the end of the business year immediately prior to the business year containing the initial listing application day.

Table -7 Hong Kong Stock Exchange: Criteria for listing of Stock is as follows Profit Test

Market Cap/ Revenue Test

Market Cap/ Revenue/ Cash flow Test

Profit Attributable to Shareholders

At least HK$50 million in the last 3 financial years (with profits of at least HK$20 million recorded in the most recent year, and aggregate profits of at least HK$30 million recorded in the 2 years before that)

- -

Market Cap At least HK$200 million at the time of listing At least HK$4 billion at the time of listing

At least HK$2 billion at the time of listing

Revenue - At least HK$500 million for the most recent audited financial year

At least HK$500 million for the most recent audited financial year

Cash flow - - Positive cashflow from operating activities of at least HK$100 million in aggregate for the three preceding financial years

Table -8


Korea Stock Exchange:

Criteria Listing Requirements

Years in operation since incorporation

At least 3 years

Business size

Equity Capital*

At least KRW 30 billion

No. of Shares to be listed

At least 1 million shares

Distribution of stocks To meet all of the following requirements : 1) To meet any one of the following shares requirements ⋅At least 25% of shares or 5 million shares held by public shareholders ⋅At least 25% of shares or 5 million shares to be publicly offered(Including no. of shares before submission of application for listing eligibility review) ⋅At least 10% of shares to be publicly offered after submission of application for listing eligibility review & At least the No. of the public offered shares should be as follows - 1 million shares : KRW 50 billion Equity Capital < KRW 100 billion or KRW 100 billion Market Capitalization < KRW 200 billion - 2 million shares : KRW 100 billion Equity Capital < KRW 250 billion or KRW 200 billion Market Capitalization < KRW 500 billion - 5 million shares : KRW 250 billion Equity Capital or KRW 500 billion Market Capitalization ⋅In case of the simultaneous offering in Korea and abroad, At least 10% of shares and 1 million shares to be publicly offered 2) At least 5% of shares and KRW 1 billion to be publicly offered after submission of application for listing eligibility review 3) At least 1,000 public shareholders ※ No restriction placed on transfers of shares

Table -9 4- CIRCUIT FILTERS -The study is restricted to the performance of the Indian Stock market, Japan, Hong Kong,

Korean, Russian and the New York Stock exchanges. Hence we will be concentrating on the Asian Financial Crisis,

Dot-Com Bubble, and the Russian Financial Crisis etc As a counter measure to the instability of the stock market,

various measures were introduced to avoid huge losses. One such solution is circuit breakers. When the stock

price breaches a stipulated price band as decided by stock exchanges, trading in that particular stock is

suspended. For example, if we have a share price of Rs 100, and there is a circuit breaker of 5%, it will stop trading

if the share price goes above Rs 105. Similarly, if the stock drops below Rs 95, the lower end circuit filter is applied

and trading is suspended.


Exchange Percentage Change to trigger circuit breaker NSE Market-wide: 3 stages-10%, 15%, 20% of

index movement Individual Scrips (depending upon type of scrip) 2%, 5%, 10% movement of individual scrip

BSE Market-wide: 3 stages-10%, 15%, 20% of index movement Individual Scrips (depending upon type of scrip) 2%, 5%, 10% movement of individual scrip

Tokyo Stock Exchange 2 stage- 5%, 10% NYSE 3 stage-10%, 20%, 30% (Set every quarter) Korean Stock Exchange Single stage-10%

Table -10 National Stock exchange:- The extent of duration of the market halt and pre-open session is as given below Trigger limit Trigger time Market halt duration Pre-open call auction session post

market halt

10% Before 1:00 pm. 45 Minutes 15 Minutes At or after 1:00 pm upto 2.30 pm

15 Minutes 15 Minutes

At or after 2.30 pm No halt Not applicable 15% Before 1 pm 1 hour 45 minutes 15 Minutes

At or after 1:00 pm before 2:00 pm

45 Minutes 15 Minutes

On or after 2:00 pm Remainder of the day

Not applicable

20% Any time during market hours Remainder of the day

Not applicable

Table- 11 Exchange shall compute the Index circuit breaker limits for 10%, 15% and 20% levels on a daily basis based on the

previous day's closing level of the index rounded off to the nearest tick size. In addition to this, there are also price

bands for individual securities. Daily price bands are applicable on securities as below:

Daily price bands of 2% (either way) Daily price bands of 5% (either way) Daily price bands of 10% (either way)

Bombay Stock Exchange: Market Wide Circuit Breakers:-The earlier Circuit Filters at individual scrip level used to restrict the movements of

indices as well. Now, there are no Circuit Filters on the scrips forming part of popular indices like SENSEX. In order

to contain huge price movements of index scrips, SEBI has mandated that Market Wide Circuit Breakers (MWCB)


which at 10-15-20% of the movements in either BSE SENSEX or NSE Nifty whichever is breached earlier would be

applicable. This would provide a cooling period to the market participants and to assimilate and re-act to the market

movements.

The trading halt on all stock exchanges would take place as under;

In case of a 10% movement in either index, there will be a 1-hour market halt if the movement takes place

before 1:00 p.m. In case the movement takes place at or after 1 p.m. but before 2:30 p.m., there will be a

trading halt for 1/2 hour. In case the movement takes place at or after 2:30 p.m., there will be no trading

halt at the 10% level and the market will continue trading.

In case of a 15% movement in either index, there will be a 2-hour market halt if the movement takes place

before 1:00 p.m. If the 15% trigger is reached on or after 1:00 p.m. but before 2 p.m., there will be a trading

halt for 1 hour. If the 15% trigger is reached on or after 2:00 p.m., the trading will halt for the remainder of

the day.

In case of a 20% movement in either index, the trading will halt for the remainder of the day.

The above percentage would be translated into absolute points of the Index variation on a quarterly basis. These

absolute points are revised at the end of each quarter. The Market Wide Circuit Breakers at a national level have

been introduced in the Indian markets for the first time. This is on the lines of the system prevailing in the US

markets.

Tokyo Stock Exchange: Criteria for Triggering a Circuit Breaker: In case when a buy (sell) order is placed to the central contract month at

the upper (lower) price limit (may be followed by the execution at this price), and there is no trade at other prices for

next 5 minutes.

Duration of a Temporary Trading Halt: All contract months will be halted for 10 minutes when the central contract month meets above criteria. Exceptions for Circuit Breakers in TSE:

1. Once Daily Price Limits is expanded to level 3, and meets the circuit breaker criteria again: Trading halt

and expanding daily price limits shall not be executed until the end of evening session.

2. In case where the above criteria are met within 20 minutes before the end of afternoon or evening session:

Trading halt and expanding daily price limits shall not be executed until the end of session.


3. In case where the above criteria are met within 10 minutes before the end of morning session: Trading halt

will continue until the end of morning session.

4. In addition to the above cases, in cases where TSE deems that, in consideration of the market conditions,

the state of trading is to be abnormal: Trading halt and expanding the daily price limits may be executed

regardless of the above circuit breaker criteria.

NYSE: In response to the market breaks in October 1987 and October 1989, the New York Stock Exchange

instituted circuit breakers to reduce volatility and promote investor confidence. By implementing a pause in trading,

investors are given time to assimilate incoming information and the ability to make informed choices during periods

of high market volatility. In 2012, in connection with its approval of the Regulation NMS Plan to Address

Extraordinary Market Volatility, commonly referred to as the Limit Up – Limit Down Plan, the SEC approved

amendments to Rule 80B (Trading Halts Due to Extraordinary Market Volatility) that revise the halt provisions and

circuit-breaker levels. Amended Rule 80B is operative during the pilot period of the Limit Up – Limit Down Plan.

Rule 80B: Effective April 8, 2013, amended Rule 80B will be in effect. Amended Rule 80B replaces:

The DJIA with the S&P 500 as the benchmark index for measuring a market decline; The quarterly calendar recalculation of Rule 80B triggers with daily recalculations; and The 10%, 20%, and 30% market decline percentages with 7%, 13%, and 20% market decline percentages.

Amended Rule 80B also modifies:

The length of the trading halts associated with each market decline level; and

The times when a trading halt may be triggered.

Specifically, the circuit-breaker halt for a Level 1 (7%) or Level 2 (13%) decline occurring after 9:30 a.m.

Eastern and up to and including 3:25 p.m. Eastern, or in the case of an early scheduled close, 12:25 p.m.

Eastern, would result in a trading halt in all stocks for 15 minutes. If the market declined by 20%, triggering

a Level 3 circuit-breaker, at any time, trading would be halted for the remainder of the day.

A Level 1 or Level 2 halt can only occur once per trading day. For example, if a Level 1 Market Decline was

to occur and trading was halted, following the reopening of trading, the NYSE would not halt the market

again unless a Level 2 Market Decline was to occur. Likewise, following the reopening of trading after a

Level 2 Market Decline, the NYSE would not halt trading again unless a Level 3 Market Decline were to

occur, at which point, trading in all stocks would be halted until the primary market opens the next trading

day.


KSE: Circuit Breakers in stock market:

Circuit breakers in stock market is a system that temporarily suspends all the trading in the market in order

to provide investors with time for calm judgment of investment if there arises a slump in stock price

resulting from the interior and exterior reasons of the market, and all the trading shall be suspended in case

KOSPI decreases continuously for 1 minute more than 10% of closing price of the very preceding day. And,

Circuit breakers might be announced in advance in case of 10% decrease of KOSPI.

Once circuit breakers are exercised, suspension is made for 20 minutes with regard to receipt of offer in the

market and to receipt of offer as well as trading in futures/option market linked with that of spots except

bond market. During suspension, however, it is not possible make a new offer but possible to cancel offer

submitted prior to suspension.

The KRX resumes trading 20 minutes after issue of circuit breakers. The first price shall be formed in single

price for 10 minutes from the resumption and then crowd trading shall be applied to.

It has been exerted 3 times (2000.4/17/2000, 9/18/2000, and 9/12/2001) since its introduction in December 1998. Daily price limits:

Daily Price Limit is upper and lower bound to which the price of each issues can move on a certain day.

Thus, any investors or member firms cannot place orders or quotations that exceed the upper or lower

price limits.

Current price limit in the KOSPI market is 15% for stocks (equities), KDRs, and ETFs. On each day 15%

shall be multiplied to the base price of the issue and such amount shall be added to the base price for an

upper price limit and subtracted from the base price for a lower price limit.

HKSE: Earlier, a two-tier circuit-breaker is being considered, under which trading would stop for half an hour in the

event of a 15% fluctuation over the previous day’s close, and for one hour in the event of a 25% fluctuation.

Another option being considered is an individual circuit-breaker per stock, which would cause a ten minute open-

outcry auction to be initiated every time a stock price varied more than 10% over last day’s close.

5- Trading and Settlement Cycle This segment takes care of the efficiency issue of the said stock exchange. It

basically looks into the speed at which any of the numerous transactions affected in the market gets settled. This is

especially crucial given the volume. We see that Indian exchanges are at par with the best in the world when it

comes to efficient settlement. It can even go one up if the proposed ‘T+1’system is put in place.


Below are the various settlement cycles for the stock exchanges.

EXCHANGE SETTLEMENT CYCLE NSE T+2 BSE T+2 NYSE T+3 Korean Stock Exchange T+2 Tokyo Stock Exchange T+3 Hong Kong Stock Exchange T+2

Table -12 B) Quantitative Analysis The research that the exchanges impact each other has been studied through various

Statistical methods with data on price, returns collected from the exchanges. The following methods have been used for the quantitative analysis to validate the research study: 1. Correlation analysis 2. Exponential trend analysis 3. Risk-return analysis

1-Correlation Analysis

A) NSE v/s Russian Stock Exchange

Graph -1, When we see the above graph, we can understand that NSE is very volatile compared to MICEX. There are many ups and downs for NSE, but MICEX sees like narrow range. For NSE the major drop started in 2008, it’s mainly because there is a recession going on all over the world. MICEX is little stable compared to NSE. But, later by 2010, NSE regained its strength and started booming. There are few dips in NSE price movements but, it’s just because of corrections. We can conclude that MICEX is less volatile and NSE is highly volatile.


A) NSE v/s Hongkong

Graph -2, From the above table it’s very evident that the Hang Seng price movements were very hugely volatile because of recessionary period all over the world in 2007 and 2009 period. HKSE’s price performance is very volatile compared to the NSE, We can say that NSE Index prices were better stable than the HKSE index. We can conclude that there is no correlation between these two stock exchanges at all.

A) NSE v/s NYSE

Graph-3


As USA is technologically advanced and world leaders its index prices were also quoted at high levels. NSE was rising with the NYSE because India had benefited much from the tech boom in the years along with the NYSE. The high dependence of India on the US in trade was reflected by the two stock exchanges.

A) NSE v/s Korean Stock Exchange

Graph -4 From the above graph, we can see the more volatility level in the NSE index because of recessionary conditions. KSE Index was merely very stable. NSE index has given more returns with high risk. But, KSE has given moderate returns with low risk compared to the NSE.

Stock Price Correlation among Stock Exchanges Year/Variables Korean Russian Hong Kong New York NSE

2003-2013 Korean 1 0.740578

0.958494 0.665375 0.958494

Russian 0.740578

1 0.897505

0.533966

0.707778

Hong Kong 0.958494

0.897505

1 0.627811

0.916578

New York 0.665375

0.533966

0.627811

1 0.627811

NSE 0.958494

0.707778

0.916578

0.627811

1

Table -13


2- Exponential Trend A) Russian Closing Price

Graph -5

A) NSE Closing Price

Graph -6


A) NYSE Closing Price

Graph -7 D ) Hang Seng Closing Price

Graph -8


A) Korean Closing Price

In the above figures, it can be seen that NSE seemed to follow the exponential trend quite reasonably before the

technology boom had hit the Indian stock market in the year 2003. After that NSE has much larger rise which could

not be captured in the exponential trend. Russian stock exchange has also been explained by the exponential trend

method quite reasonably before year 2003. Exponential trend has been able to capture the trend quite well the

changes in NYSE. R-square value is around 0.196. This shows that the model is able to explain around 20% of the

variations of the index. For, both the stock exchanges of Korea and Honk Kong have shown very high volatility over

this period and have risen consistently enough. Thus exponential trend line is able to explain the price behavior of

these exchanges satisfactorily. The R-square values are significantly very high when compared to NYSE i.e. 0.563

and 0.758 for Korean and Hang Sang respectively.

3- Risk and Return Year NSE Hong Kong New York Korean RSE Risk

(σ²) Return Risk

(σ²) Return Risk

(σ²) Return Risk

(σ²) Return Risk

(σ²) Return

2003 254.3 22% 1321.8 15% 488.1 10% 86.6 13% 54.2 28% 2004 159 6% 758.9 1% 236.2 3% 54.1 4% 44.7 6% 2005 263.5 13% 652.3 5% 237.5 5% 148 16% 284.8 35% 2006 346.9 15% 1394.1 13% 351.1 6% 56.5 1% 140.1 25% 2007 723.3 19% 3506.7 8% 350.6 3% 203.8 8% 116.5 -7% 2008 918.3 -26% 4185.6 -16% 1381.2 -19% 273.2 -11% 247.8 31% 2009 870.2 26% 3457.1 19% 794.6 11% 188.1 17% 109.8 12% 2010 420.5 7% 1314.3 3% 328.6 5% 139.5 9% 135.2 7% 2011 350.2 -11% 2160.9 -8% 521.1 -26% 142.2 -3% 84 -5% 2012 301.7 10% 1086 9% 301.9 4% 69.1 1% 61.7 1% 2013 227.3 3% 871.2 2% 473.8 9% 56.3 -0.2% 39.9 3%

Table-14


From the return perspective, except Korean Stock Exchange all other exchanges seem to be stable as there are

three years all together when KSE has given the negative returns, i.e. in the years 2008, 2011 and 2013. Russian

stock exchange is the most volatile of all these and has given returns from 35% to -7%. NSE seems to have

followed or moved in tandem with the NYSE more after year 2003. Hang Seng exchange follows long cycles. If

returns turn negative, they remain negative for two or three years. Similarly if return turns positive, then they remain

so again for two or more years, Russian stock exchange has shown the least variation and hence appears to be

least risky. But actually there is very less trading in the Russian stock market during the period of 2003-2013 due to

stagnation and political instability and uncertainties about economy. Korean stock market is also very stable form

the standard deviation angle. But this market has also not much appreciated over these years and it remains more

or less range- bound. Hang Seng has shown the highest volatility as it is a much traded stock exchange. Also, the

events like Sub-Prime crisis have also affected the volatility of the exchanges. But, nevertheless, the volatility has

reduced in the recent years than it has in the past period. Yet, it is more volatile than the other stock exchanges

that we have compared. NYSE is a mature and most stable market of all these.

Conclusion and Recommendations

The study brings forth some distinct conclusions many of which validate popular beliefs. The objective of the whole

research was to try and compare the various stock exchanges based on certain parameters in order to understand

the impact of integration of the financial world on the various entities within it especially in the context of

globalization and increased interest in the capital markets fuelled by surging growth. Qualitatively, the comparison

showed that Indian stock exchange has the governance system and an efficient mechanism in place to be a world

class institute, specially the requirements of Clause 49 promulgated by SEBI and the advanced trading and

settlement mechanism of NSE, respectively. However, unfortunately our implementation of the same remains a

problem area with almost 15-20% of the listed companies yet to align their operations as required under the law.

However, Indian stock market is very much at the same pedestal and, in fact, better than most of its Asian

counterparts especially the emerging economies. Indian system enjoys creditability even when compared with a

stock exchange like Nikkei (Japan). If we look at the efficiency of trading captured by the ‘trading and settlement’

mechanism, then we have found that the Indian mechanism is faster than the NYSE and at par with the best in the

world. In fact, it is one of the fastest. The markets have indeed started to integrate and Indian market is no

exception especially after 2003-04. The regulatory authorities must remove any ambiguity that may be existing

when compared to the regulations of other exchanges before they can actually make the grade. Lastly, although it

has to be accepted that the market is evolving but the Indian system has already attained the minimum level of

robustness and efficiency to be counted among the best in the world and stand equipped to attain higher

sophistication as well as heightened activities. As for the existence of any signals or patterns among the stock


exchanges, it can safely be said that the markets do react to global cues and any happening in the global scenario

be it macroeconomic or country specific (foreign trade channel) affect the various markets.

Text & References

Dhal, J. R. (n.d.). Integration of India’s stock market with global and major regional markets. 1-35.

Dr. M.V. Subha, M. S. (2010). A study on cointegration between indian and american stock

markets. JOURNAL OF CONTEMPORARY RESEARCH IN MANAGEMENT , 3-9.

Dr.N.M.Elango, K. a. (2011). An Efficient Approach to Forecast Indian Stock Market Price and their Performance Analysis. International Journal of Computer Applications , 1-6.

Ghosh, M. R. (2004). Stock Market Volatility- An international Comparison. Securities and

Exchange Board of India , 8-25.

Gupta, N. (2011). COMPARATIVE STUDY OF DISTRIBUTION OF INDIAN STOCK MARKET WITH OTHER ASIAN MARKETS. International Journal of Enterprise Computing and Business Systems , 1-20.

Joshi, P. (n.d.). Market Integration and Efficiency of Indian Stock Markets: A study of NSE. 29.

Websites: www. krx.co.kr www.moex.com www.bseindia.com: www.nseindia.com: www.tse.or.jp nyse.nyx.com www.hkex.com

http://www.moex.com

http://www.bseindia.com:

http://www.nseindia.com:

http://www.tse.or.jp

http://www.hkex.com

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