A Study of the impact of NASDAQ on Indian

Technology Stocks Index (BSE TECk)

Hitesh Shah, Lalit Garg an d Pras a d Deshmuk h

Time and again it has been claimed that Indian new economy stocks, especially technology stocks act in unison with
NASDAQ composite index. Yet, not much of research is done to check veracity of such claims. This paper is an
attempt to establish any such relationship, if present. It aims at checking whether any link exists between
movements of NASDAQ and Indian technology stocks. BSE TECk, launched by BSE in 2001, is taken as a
representative of new economy stocks, for testing the hypothesis. The paper first proves the non stationarity of both
financial series and then goes on to prove that these two indices are cointegrated. Finally, it establishes a causal
relationship between NASDAQ composite index and BSE TECk. The findings prove that NASDAQ indeed directs
the movement of Indian new economy stocks represented by BSE TECk.

INTRODUCTION Securities Dealers Automated Quotation, is the

Whether Indian stocks dance to the tune of
NASDAQ composite index - remains one of
the most interesting research areas. Instances
has been found where analysts claim that
Indian stocks especially those in TMT sector
have very strong co-relation with the
performance of the NASDAQ 1. Newspaper
articles carry several mentions of the Sensex
having significant correlation with NASDAQ.
However we could not find any published
formal study that has tested the relation
between performance of Indian TMT stocks
and NASDAQ. Till late, researchers faced an
absence of an appropriate benchmark index
for Indian TMT stocks. However, in April of
2001, BSE started a new benchmark index for
these stocks the BSE TECk Index.
We attempted to study presence of
relationship between the NASDAQ Composite
Index and the BSE TECk Index using co-
integration.
NASDAQ Composite Index: NASDAQ,
which stands for National Association of
market specifically for Technology stocks from
across the world. The NASDAQ Composite
Index is the most widely tracked technology
stock index in the world. It measures all
domestic and international equity stocks listed
on the NASDAQ stock market. The index
started with a base of 100.00 on February 5,
1971 and includes over 4,000 companies. 2
NASDAQ Composite Index is widely accepted
as a global benchmark for the TMT sector.
BSE TECk index: BSE TECk index was
launched by Bombay Stock Exchange to
provide a reliable index for benchmarking the
performance of the TMT (Technology Media
and Telecom) sectors in India. It uses free-float
market capitalization method considering
shares held only by non-promoters. In India,
TMT stocks account for approximately 68% of
total daily turnover. It includes 21 stocks
belonging to Technology (BSE Sector:
Information Technology), Entertainment (BSE
Sector: Media & Publishing), Communication
(BSE Sector: Telecom), and other Knowledge
based sectors (companies not falling in any of
the first 3 sectors). It started with a base of
1000.00 on April 02, 2001.3 Past values for the

2
Index Descriptions, Retrieved November 29, 2002
from
http://dynamic.nasdaq.com/reference/IndexDescript
ions.stm
3
About BSE Indices, Retrieved November 29,
1
India's IT industry seen simmering down on U.S. 2002 from
economy slowdown, Sumeet Chatterjee, , India http://www.bseindia.com/about/abindices/bseteck.a
Abroad News Service, December 23, 2000 sp

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 same are calculated till beginning of 2000 and
are available on BSE website. BSE TECk is
being used by many TMT sector mutual funds
to benchmark their performance and is
emerging as the leading Indian benchmark for
TMT sectors.
DATA
Data comprises of daily closing prices of the
BSE TECk Index and the NASDAQ Composite
Index from January 01, 2001 to November 29,
2002. This period involves 480 trading days for
BSE TECk Index and 477 days for the
NASDAQ Composite Index. Only those
closing points were taken where values for
both indexes were present. Data for the BSE
TECk Index was retrieved from BSE website at
http://bseindia.com/histdata/hindices.asp
METHODOLOGY
To find out the relationship between the
NASDAQ and the BSE TECk we have two
stages. First of all the non stationarity of the
time series data has to be established. If the
data series are not non-stationary we can go
ahead and apply the tests for cointegration
and establishing causality. Therefore in the
first stage we test the non stationarity of the
NASDAQ and the BSE TECk. As part of the
first stage we have carried out the visual tests,
and the Box Ljung test.
In the second stage we actually establish the
relationship and the causality between the two
data series. The relationship is established
using a three step process. First the correlation
is found between the two, which is followed
by the cointegration test which tests whether
the two are cointegrated or not. In the last we
make use of the Grangers test to establish the
causality between the two.
RESULTS
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Stage 1: Establishing Non stationarity of
the time series
To establish the non stationarity of the
NASDAQ and BSE TECk index we carry out
visual tests and Box Ljung tests.
The summary of these tests is as follows
1. Visual test (Vide Exhibit 1)
The visual inspection of Auto correlation
values for the NASDAQ and the BSE TECk
shows that they taper off gradually. If the
values taper off gradually it indicates that the
series would be non stationary. One more
robust test is the box Ljung test, which is
described as follows.
2. Box Pierce / Box Ljung Test:
The Box Ljung test is used to find out the
stationarity of a series.
The null hypothesis is
H0 : k = 0 1(1)m , m= lag length
where k is auto-correlation coefficient for
different lag lengths.
If H0 is true then the process is stationary in
nature.
H1: k not equal to 0 and so the series is non
stationary in nature.
By checking the p values we find that for up to
lag of 10 we have the p value less than 0.001.
So we can reject the hypothesis and conclude
that the series is non stationary. This is true for
both the NASDAQ and BSE TECk index.
Establishing Stationarity of the I(1) for both
the NASDAQ and the BSE TECk. :
(Vide Exhibit 2)
The next step after establishing the non
stationarity of the sample data is to establish
the stationarity of the first order differences of
the NASDAQ and the BSE TECk. For this we
follow the same process as outlined before.
1. Visual check: We find that for the both auto
correlation and the partial auto correlation
functions the value does not tapers off
gradually and so the series is random in
nature. From this we can conclude that I(1) of
both the data series is stationary in nature.

2. Box Pierce / Box Ljung Test:By checking the
p values we find that for up to lag of 10 we
have the p value is more than 0.001. So we can
accept the hypothesis at 99% confidence level
and conclude that the series is stationary. This
is true for both the NASDAQ and BSE TECk
index.
Stage 2: Establishing Relationship
After establishing the non stationarity of the
data series we can go ahead and test for the
relationship between the NASDAQ and the
BSE TECk indices.
Decision Rule: when mod (test statistic t)
>mod (Asymmetrical critical value) then H0 is
rejected.
Stage 3: Testing for Co-integration
Results of Co-integration test are given below:
Cointegrating regression - constant, trend
No. of Observation = 1790
Regressand : BSE_TECk
R-SQUARE = 0.9573
DURBIN-WATSON = 0.4492x10-1
DICKEY-FULLER TESTS ON RESIDUALS -
NO.LAGS = 41 M = 2
TEST ASY. CRITICAL

The tests undertaken begin with the basic ones STATISTIC VALUE 10%
like the regression and correlation. In this test
we find out the regression coefficient between NO CONSTANT, NO TREND
the two series, the results of which will T-TEST -4.4238 -3.50
indicate the level of correlation between the AIC = 5.433
two indices. SC = 5.564
From the results it is clear that R 2 value is high.
1. Regression Model: (Vide Exhibit 3) But Durbin Watson coefficient is near to zero.
The results of the regression and correlation Hence, the R2 may be spurious.
are as follows. The value of R 2 is 0.60. This To check if R2 is spurious we look at the results
means NASDAQ explains 60% of the variance of Dickey Fuller test.
in BSE TECk. But this is not enough to Here
conclude that NASDAQ has an influence upon H 0: BSE_TECk and NASDAQ are not co-
the BSE TECk. So we carry out the integrated
cointegration test. H 1: BSE_TECk and NASDAQ are co-
integrated
2. Durbin Watson Test: We have established Results: t obtained = - 4.4238
higher R2 between the regressand and the t critical= - 3.50
regressor. Durbin Watson test checks for Hence we see that H 0 stands rejected at 90%
autocorrelation between the error terms in the confidence level.
Regressor Equation. When the error terms are Hence, BSE-TECk and NASDAQ are co-
auto correlated R 2 may be spurious. integrated.
When
Durbin Watson coefficient DW = 0 or 4 then Establishing causality:
R2 may be spurious. We have used Granger Causality test for
(DW= 0.4492x10-1 here) checking if there exists any causality between
NASDAQ and BSE TECk series. The results of
3. Dickey Fuller Test: this test are as follows.
Dickey Fuller test is used for checking
cointegration between two time series. Test A:
H0: There is no cointegration between two H 0 : NASDAQ does not Granger-cause BSE
seriesNull Hypothesis TECK
H1: There is cointegration between two series H 1 : NASDAQ Granger-causes BSE TECK
.. Alternate Hypothesis
Test B:

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 H 0 : BSE TECK does not Granger-cause
NASDAQ
H 1 : BSE TECK Granger-causes NASDAQ
Results Table: (obtained by using Shazam)
It can be inferred from the above result table,
H0 in Test A stands rejected at 95% confidence
level. Hence, NASDAQ Granger-causes BSE
TECK.
Further, H0 in Test B stands accepted at 95%
confidence level. Hence BSE TECK does not
Granger-cause NASDAQ.
The results indicate that changes in NASDAQ
are reflected in BSE TECk and not the other
way around. This is true till a lag time of 6
days.
UTILITY OF THE REGRESSION
MODEL
Now that we have proved that R 2 is not
spurious we define the utility of the regression
Model that we have found in regression test.
This model is a Best Fit equation obtained with
Least Square Criteria:
BSE_TECk t = (-112.944 + 0.599*
NASDAQ t-1)
Where: BSE_TECk t = value of BSE TECk on t
day
NASDAQt-1 = value of NASDAQ on (t-1) day
The model is a least square fit for BSE TECk
values on NASDAQ values with one day lag.
But it will not always give absolute value of
BSE TECk from NASDAQ value on the prior
date. Consequently the estimated values
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should be used to identify trend and not absolute
value of BSE TECk on a particular day.
LIMITATIONS
1. BSE TECk is a young index. It was launched
in year 2001 and has not seen even one
complete business cycle that runs in about 4-5
years. Hence, this analysis will give better
representation when it is run on data for a
complete business cycle.
2. BSE TECk comprises technology stocks and
other knowledge based industry stocks only
whereas NASDAQ is a broad based index.
Moreover, there may be impact of other
domestic indices like BSE SENSEX. We have
not considered this in our analysis. Another
such possibility is checking effect of other
international technology indices like LSE
(London Stock Exchange) TECk MARK. (The
LSE TECk MARK was launched in November
1999 as a benchmark for TMT sector stocks
listed on LSE)
3. One of the intrinsic limitations of co-
integration models is that it does not reveal
the parameters or structural equations in the
models, yet it informs us of important
information about the true models linking
the variables investigated. Thus the results
obtained from the research can be used to
identify trend reversals. However absolute
closing values for the BSE TECk Index may
not always be predicted correctly from closing
values of the NASDAQ Composite Index.
CONCLUSION
Till now we have proved that-
1. Both NASDAQ and BSE TECk
financial series are non stationary
2. Their first differences form a
stationary series
3. Both the series are co-integrated
4. NASDAQ Granger-causes BSE TECK
5. BSE TECK does not Granger-cause
NASDAQ
Hence we conclude that movement in
NASDAQ causes movement in BSE TECk.
 Both are positively correlated with correlation
coefficient as 0.775 and R 2 value of 60%.
The regression model that we have formulated
is a least square fit for BSE TECk values on
NASDAQ values with one day lag.
But the estimates will rarely match with the
absolute value that BSE TECk may reach a day
after NASDAQ has changed on prior date.
Consequently, the estimated values should be
used to identify trend and not judge absolute
value of BSE TECk on a particular day.
http://www.indiainfoline.com/lyas/nevi/dive.s
html
http://www.indiainfoline.com/trac/tr09.html
Chatterjee, Sumeet. India's IT industry seen
simmering down on U.S. economy
slowdown, India Abroad News Service,
December 23, 2000 Index Descriptions,
Retrieved November 29, 2002 from
http://dynamic.nasdaq.com/reference/IndexDe
scriptions.stm

REFERENCES

http://dynamic.nasdaq.com/reference/IndexDe
scriptions.stm
http://www.bseindia.com/about/abindices/bse
teck.asp
http://www.apnic.net/mailing-lists/s-asia-
it/archive/2000/12/msg00052.html
http://www.blonnet.com/iw/2000/04/23/stories
/0823h012.htm

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 APPENDIX

Exhibit 1:
Autocorrelations: BSE TECk
Auto-
Lag Corr. 75 -.5 -.25 0 .25 .5 .75 1 Box-Ljung Prob.

1 .983 . *.****************** 446.734 .000
2 .964 . *.***************** 876.912 .000
3 .947 . *.***************** 1293.491 .000
4 .931 . *.***************** 1696.890 .000
5 .915 . *.**************** 2086.744 .000
6 .899 . *.**************** 2464.029 .000
7 .882 . *.**************** 2828.011 .000
8 .865 . *.*************** 3178.782 .000
9 .847 . *.*************** 3516.324 .000
Total cases: 460 Computable first lags: 458

Autocorrelations: NADAQ
Auto-
Lag Corr. 75 -.5 -.25 0 .25 .5 .75 1 Box-Ljung Prob.

1 .987 . *.****************** 450.978 .000
2 .973 . *.***************** 890.517 .000
3 .963 . *.***************** 1321.632 .000
4 .953 . *.***************** 1744.816 .000
5 .942 . *.***************** 2159.171 .000
6 .930 . *.***************** 2564.403 .000
7 .916 . *.**************** 2958.455 .000
8 .901 . *.**************** 3340.405 .000
9 .887 . *.**************** 3711.146 .000

Total cases: 460 Computable first lags: 459

Exhibit 2:
Autocorrelations: First order differences in BSE TECk
Auto-
Lag Corr. -75 -.5 -.25 0 .25 .5 .75 Box-Ljung Prob.

1 .016 . * . .120 .729
2 -.038 .* . .798 .671
3 -.006 . * . .814 .846
4 .039 . *. 1.521 .823
5 -.001 . * . 1.521 .911
6 .001 . * . 1.521 .958
7 -.023 . * . 1.765 .972
8 .002 . * . 1.768 .987
9 .030 . *. 2.199 .988
10 -.004 . * . 2.209 .994

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 Total cases: 460 Computable first lags: 459

Partial Autocorrelations: First order differences in BSE TECk

Pr-Aut- Stand.
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1

1 .016 .047 . * .
2 -.039 .047 .* .
3 -.005 .047 . * .
4 .038 .047 . *.
5 -.002 .047 . * .
6 .004 .047 . * .
7 -.023 .047 . * .
8 .002 .047 . * .
9 .029 .047 . *.
10 -.006 .047 . * .

Total cases: 460 Computable first lags: 459

Autocorrelations: First order differences in NASDAQ

Auto- Stand.
Lag Corr. Err. 75 -.5 -.25 0 .25 .5 .75 Box-Ljung Prob.

1 .029 .046 . *. .380 .538
2 -.052 .046 .* . 1.644 .440
3 .013 .046 . * . 1.727 .631
4 .001 .046 . * . 1.727 .786
5 -.016 .046 . * . 1.845 .870
6 -.010 .046 . * . 1.891 .929
7 .001 .046 . * . 1.892 .966
8 -.007 .046 . * . 1.915 .984
9 -.013 .046 . * . 1.997 .992
10 -.012 .046 . * . 2.064 .996

Total cases: 460 Computable first lags: 459

Partial Autocorrelations: First order differences in NASDAQ

Pr-Aut- Stand.
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1

1 .029 .047 . *.
2 -.053 .047 .* .
3 .017 .047 . * .
4 -.003 .047 . * .
5 -.014 .047 . * .
6 -.009 .047 . * .
7 .000 .047 . * .
8 -.008 .047 . * .
9 -.013 .047 . * .
10 -.012 .047 . * .
Total cases: 460 Computable first lags: 459

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 Exhibit 3:
Regression of BSE TECk on NASDAQ with one day lag.

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 0.779 0.607 .606 179.38512

ANOVA
Model Sum of Squares df Mean Square F Sig.
1 Regression 22722247.736 1 22722247.736 706.120 .000
Residual 14705813.208 457 32179.022
Total 37428060.945 458
a Predictors: (Constant), NASDAQ
b Dependent Variable: BSE_TECk

Coefficients
Unstandardized Standardized t Sig.
Coefficients Coefficients
Model B Std. Error Beta
1 (Constant) -112.944 41.556 -2.718 .007
N .599 .023 .779 26.573 .000
a Dependent Variable: BSE_TECk

Best Fit equation obtained with least square criteria:

BSE_TECkt = (-112.944 + 0.599*NASDAQt-1)

BSE_TECkt = value of BSE TECk on t day

NASDAQt-1 = value of NASDAQ on (t-1) day

t is expressed in days.

About the Author(s)

Hitesh Shah is second year student of post graduate diploma in management at IIM Lucknow. He is
a computer engineer from Government College of Engineering, Pune and has worked for a year in
software development firm. He is specializing in Finance and his areas of interests are stock market,
corporate risk evaluation, etc.

Lalit Garg is second year student of post graduate diploma in management at IIM Lucknow. He is an
Electronics engineer from Punjab Engg College Chandigarh and has worked for a year in a software
development firm. He is specializing in Finance & systems and his areas of interests are corporate
restructuring, banking etc.

Prasad Deshmukh is second year student of post graduate diploma in management at IIM Lucknow.
He is a mechanical engineer from Pune University and has worked for a year in Telco. He is
specializing in Finance and Marketing. His areas of interests are stock market, corporate risk
evaluation, Game Theory etc.

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