Exploring A Tri-Cornered Relationship

This article by Dr Ruzbeh Bodhanwala and CA Shernaz Bodhanwala provides an understanding of the impact of CNX Nifty, SGX Nifty and Singapore Straits Times Index on each other

In a globalised world all economies are coupled and the ripple effects of one economy on another cannot be ruled out. Investors who trade in Index futures in India do follow what is happening in Singapore (STRAITS), being an Asian counterpart, and the SGX Nifty. In this study we examine the relationship between the two markets NSE Nifty and Singapore Straits and also examine the behaviour between CNX Nifty and SGX Nifty.

CNX Nifty is a diversified market capitalization-weighted index comprising 50 large and liquid stocks from the Indian market. Regular trading in the Indian markets takes place between 9:15 am to 3:30 pm. SGX Nifty is an Indian CNX Nifty-based future contract traded on the Singapore stock exchange. The advantage of trading on the Singapore stock exchange is that it gives investors extended trading hours for trading on CNX Nifty since the Singapore market opens 2.5 hours before the Indian markets. Singapore also has extended hours of trading as its overnight session closes at 2 am Singapore time and the biggest advantage a financial institutional investor can have is the mitigation of currency risk as they trade in US dollars. This means an FII can participate in Indian Nifty futures using dollars beyond the normal trading hours.

It is widely believed that SGX Nifty provides the initial direction to traders in the Indian markets and is used as a prediction factor. Since the global markets are interlinked we statistically tested the relationship between NIFTY and STRAITS and the long-term relationship between CNX Nifty and SGX Nifty. We obtained data of the last five years (August 25, 2010 to August 25, 2015) and calculated the change as the difference between the previous day’s closing price and current opening price for all the three data series i.e. CNX Nifty, SGX Nifty and Straits Times Index. After rebasing all the three series, the relationship between their opening prices is as indicated below:

As can be seen, NIFTY and STRAITS (opening prices) were moving together, but in the last one year there has been a considerable divergence. NIFTY has rallied after March 2014, and one of the factors can be the positive future expectation from the newly elected government.

For studying the flow of information between the markets we first applied the co-integration test to understand if the markets share a long-term relationship. After establishing this relationship we tested how the information flows between the markets.

Co-integration between the three series suggests that there is a long-term relationship between all of them and so we proceeded to test the causal relationship using the return of the series. By application of the Pairwise Granger Causality Test we found that there is a bi-directional causality between STRAITS and CNX Nifty, which means both markets impact each other. Testing for causality between CNX Nifty and SGX Nifty, we found that CNX Nifty causes SGX Nifty. This is contrary to the general belief that movement in SGX Nifty has an impact on CNX Nifty, and though there is high correlation, information does not flow from SGX Nifty to CNX Nifty.