Do Global Financial Markets Drive Volatility in India? Evidence from a Dynamic Conditional Correlation Model

Abstract

Market interconnection and dynamic linkages increase the persistence of volatility, as shocks in one market quickly affect others, reflecting their interdependence. In this context, the objective of this study is to examine the conditional volatility and conditional correlation of selected financial markets. This study used daily data from November 1995 to February 2024, taken from the Investing.com website. The selected financial markets for this study were the Dow Jones Index, West Texas Intermediate Crude Oil (hereafter called WTI), Gold, Dollar Index, 10-year US bond yields and Nifty. The study found that WTI crude oil exhibits significant short-run and long-run volatility persistence, indicating no diversification opportunities between crude oil and the Nifty. On the other hand, the shock on the Dow Jones, Gold, Dollar Index and bond yields had insignificant effects on Nifty over a short period, which signifies their important role in short-term diversification. Furthermore, this study found no scope for long-term diversification between the Nifty and selected financial markets. Policymakers need to formulate policies to strengthen domestic financial markets and mitigate the effects of external shocks.