Existence of Cointegration between the Public and Private Bank Index: Evidence from Indian Capital Market

Satyaban Sahoo; Sanjay Kumar

doi:10.47654/v25y2021i4p152-172

Authors

Satyaban Sahoo Central University of Rajasthan Corresponding Author
Sanjay Kumar Central University of Rajasthan Corresponding Author

DOI:

https://doi.org/10.47654/v25y2021i4p152-172

Keywords:

Public Bank Index, Private Bank Index, Johansen’s Cointegration Test, Granger Causality Test

Abstract

Purpose: The study aims to examine both long-run and short-run causal relationships among the public and private bank indices of the Indian capital market.

Design/methodology/approach: The paper employs Johansen's cointegration approach and Granger Causality test, which allows measuring long-run relationships and causality among the public and private bank indices.

Findings: The empirical analysis indicates that long-run cointegrating relationships exist between public and private bank indices. On the other hand, Granger Causality reveals that the private bank index plays a dominant role; Granger causes public bank index. So, long-run diversification may not be possible due to common factors; however, short-run portfolio diversification is possible due to unidirectional causality running from private bank index to public bank index.

Originality/value: Investors often create portfolios by allocating funds to public and private bank stocks based on the performance and projected development of the bank. In recent decades, there has been a surge in interest in banking sector unification. So, the transfer of information between private and public banks witnessed a boom. To fill this research gap, the study contributes to the literature by investigating the cointegration and causality between Nifty PSU Bank and Nifty PVT Bank indices in the Indian capital market.

Implications: The study's findings have implications for investors while maximizing return on investment when diversifying capital among public and private bank stocks. The findings significantly impact traders' judgments when using hedging and arbitration strategies, guide portfolio managers when managing risk, and help policymakers assess the market stability.

Keywords: Public Bank Index, Private Bank Index, Johansen's Cointegration Test, Granger Causality Test

JEL Classification: C58 N25 O16

Author Biography

Sanjay Kumar, Central University of Rajasthan

Dr Sanjay Kumar did his Post Doctorate from California State University San Bernardino: San Bernardino, CA, US, is presently working as an Assistant Professor at the Department of Management, Central University of Rajasthan, India. He has completed his PhD from Maharaja Ganga Singh University: Bikaner, Rajasthan, India. His current research interest includes stock and derivatives markets, risk management and operation research.

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