The main objective of this piece is to explore whether any correlation exists between the Indian and the global stock market indices. The study has taken into consideration the closing figures of the Hang Seng, BSE 30 and Dow Jones indices for the period between August 13, 1998, and September 14, 1998. The dates on which any one of these indices were closed have been ignored. The correlation between the BSE 30 and any one of the other two global indices in question has been computed by dividing their respective co-variances by the product of their respective standard deviations. On squaring the resultant correlation figure, we would arrive atthe coefficient of determination, which would give us the percentage of the variance of the BSE 30, that is explained by the variation in the Hang Seng or Dow Jones indices for the period under question.

The reason for considering this particular period is because the Dow has had a roller-coaster ride for the period between August 13 and September 14. There have been several momentous events in the global financial markets during this period, and if there were indeed any correlation between the BSE and the world market, that relationship would surely be reflected. What does the record say? On August 13, the Dow was ruling at 8,552.96, on August 31 at 8,051.68 and 7,795.50 on September 14. While the Hang Seng was ruling at 6,660.42, 7,275.04 and 7,661.86 respectively. the BSE 30 was ruling at 2,990.22, 2,933.85 and 3,167.22 respectively.

On applying the theoretical method, the correlation between the BSE 30 and the Dow Jones indices for the period works out to -0.12153. This amply proves the lack of anycorrelation between the BSE 30 and the Dow Jones indices. Actually, a negative correlation would imply that the BSE 30 should move up when the Dow Jones moves down and vice-versa. But in this case, the correlation, being a negligible figure, does not have any impact. To make things even clearer, on squaring, the correlation translates into a coefficient of determination of 0.01, which means that only 1 per cent of the variance of the BSE 30 is explained by the variation on the Dow Jones index. This dispels all doubts about an existence of any correlation between the two indices.

Similarly, the correlation between the BSE 30 and the Hang Seng indices for the same period is +0.27. A positive correlation would indicate that the BSE 30 should rise when the Hang Seng moves up and vice-versa. Considering the fact that 0.27 is a small figure, we could conclude on a miniscule positive correlation here. On squaring the correlation, the coefficient of determination works out to 0.07. This means only 7 per cent of thevariance of the BSE 30 is explained by the variation on the Hang Seng.

Sources indicate that the net outflow arising out of the net sales by foreign institutional investors (FIIs) in the capital markets during August stood at $108.1 million. Of this, $90 million was on account of equity sales, while the balance was owing to the sale of debt instruments.

In this situation, our conclusions make more sense with the following trends in the Indian markets. First, FIIs have been generally withdrawing when the markets have been moving southwards, whilst going into a buying spree in a rising market. Second, domestic financial institutions have a totally opposite approach. They buy when the market is bottoming out, when stocks are supposedly available at attractive valuations, more so because of directions from the government to prop up a sagging market. Third, small individual investors are conspicuous by their absence.

It is clear from the data, therefore, that all talk of correlation between the world marketsand Indian bourses is, to say the least, premature.