Co-Integration and Causality in Indian Market Indices: Pre-COVID vs. COVID-19 Perspectives

Abstract

This study investigates the co-integration and Granger causality relationships among key indices in the Indian stock market, focusing on small-cap, mid-cap, large-cap stocks, and the Nifty indices during the pre-COVID and COVID-19 periods. Utilizing the Johansen Co-integration Test, the research examines stable long-term equilibrium relationships among these indices. Findings reveal robust co-integration between the Nifty 50 index and NIFTY100, NIFMDCP100, and NIFSMCP100 during the pre-COVID era, indicating significant interdependence. However, indices not involving the Nifty 50 showed less consistent co-integration. During the COVID-19 pandemic, while some relationships remained stable, others weakened, highlighting the pandemic’s disruptive impact. Granger causality tests further elucidate causal influences among these indices, emphasizing shifts in influence dynamics, particularly the pivotal role of the NIFTY100 index. These insights are crucial for stakeholders in finance and policymaking, offering valuable implications for portfolio management, risk mitigation, and policy formulation amidst evolving market conditions.

Keywords: Indian Stock Market, Co-Integration, Granger Causality, COVID-19, Econometric Analysis

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