Investigating the Dynamics of Financial Integration Amid Crisis in Global Economies and India

The global financial crises of 2008 and COVID-19 triggered market volatility, disrupting trade and foreign direct investment (FDI) flows, and impacting financial integration among economies. This study investigates the degree of financial integration between India and selected global economies—US, UK, China, Hong Kong, and Japan—during crises, using daily closing stock index data from January 2002 to June 2022. Econometric tools, including the Johansen Co-integration Test, Granger Causality Test, and Augmented Dickey-Fuller Unit Root Test, are applied to analyse short- and long-term financial linkages. The Johansen Co-integration Test results reveal long-term integration among all economies, with significant co-integrating equations detected (Trace Statistic = 98.18, Max-Eigen Statistic = 35.37) during the post-COVID period. However, the Granger Causality Test shows fluctuating short-term causal relationships, particularly with India and China shifting from bi-directional to uni-directional causality post-COVID. Standard deviations across indices, such as China (1.73) and India (1.51), highlight market volatility. The correlation matrix reveals a high correlation between India and the US (0.93 pre-COVID, 0.98 post-COVID), indicating limited opportunities for portfolio diversification. The results emphasise that sustained financial integration reduces diversification benefits and increases the potential for volatility spillovers during crises. Policymakers must identify highly connected markets and implement risk mitigation strategies to avoid systemic shocks. This study offers actionable insights for investors to navigate interconnected markets during turbulent times and provides guidance for future policy frameworks to enhance financial stability.