Abstract

This paper investigates the interconnectedness between the Chinese and Indian stock markets using Vector Autoregression (VAR) and Threshold ARCH (TARCH) model (VAR-VECH-TARCH). Our analysis focuses on the dynamic spillover effects, particularly their intensification following the aftermath of Covid-19 pandemic. The empirical results suggest a differentiated short-term volatility transmission. The Indian market exhibits lower dependence on its own past volatility and weaker short-term linkages with other markets compared to China and the US. However, in the long-term, cointegration is evident, implying interconnectedness across all three markets. Furthermore, our findings reveal a positive dynamic conditional correlation between the Chinese and Indian stock markets, reaching its peak during the pandemic period. Interestingly, this correlation converges to zero after July 2022, potentially reflecting a shift in investment strategies. These results contribute to a nuanced understanding of the recent investment shift from China (SHENZHENCSI) to India (BSESENSEX), highlighting the importance of recognizing the unique dynamics of each market and avoiding oversimplified interpretations.