A Study of Correlation between the Stock Market Performance and the Investment Patterns of Major Financial Instruments in India

Abstract

Through this empirical research we have tried to analyze the causal relationship between Sensitivity Index (SENSEX) of Bombay Stock Exchange and some major financial instruments prevailing in Indian Financial Market. We identified twelve such financial instruments namely Exchange Traded Funds (ETF), Equity Derivatives, Mutual Funds-Subscription, Mutual Funds- Redemption, Debentures/Bonds, Commercial papers, FII-Debt, FII-Equity, Government Securities, ODI/P-Notes, Certificate of Deposits and Corporate Bonds. We have also taken Nifty-50 index of National Stock Exchange as an independent financial instrument. And we identified three main objectives for our research. newlineIn our first objective, we analyzed the performance of two stock indices (i.e. Sensex-30 and Nifty-50) using descriptive statistics table. We found that both have normally distributed and moderately skewed data. We also noted some key milestones figures reached by these two indices. newlineIn the second objective, we analyzed the performance of selected twelve financial instruments for duration of 144 months. Using Karl Pearson s coefficient of correlation matrix table at 95% significance level, we also found pair-wise correlation factor amongst all the financial instruments. newlineFor achieving our third and main objective of this research study, we adopted a set of tests and tools. Through ADF test we confirmed that the data is stationary for all variables (instruments). For few variables (instruments) where the current data was not stationary, we confirmed that the first difference data is stationary. newlineThen, using Durbin-Watson Statistics test (ref. Table 16) we found that there is no factor of auto-correlation in the data of any instrument. We also checked serial correlation and found non-existence of any serial correlation. We used two different tests for checking the serial correlation. Please refer Table 18 and Table 19 for the results of these two tests. newline newline