Test of Co-integration and Equilibrium Relationship among the Selected Sectoral Indices: Empirical Evidence from NSE India

The main purpose of this paper is to provide insights to the investors and portfolio managers in terms of reducing portfolio risk and enhancing their returns using co integration, Vector Error Correction Model (long and short run relationships) among the selected sectoral indices. It also demonstrates the importance of usage of sector indices which provides insight for sectoral specific investment opportunities and direction for suitable investment decision for the Indian market. The present paper is based on secondary data on the closing prices of the selected sectoral indices from NSE; the span of data is from1stJanuary 2010 to 1st April 2016. The sectoral indices CNX AUTO, CNX ENERGY, CNX FMCG, CNX IT, CNX PHARMA, and CNX BANK are selected based on market capitalization. We employed the unit root test ADF (Augmented Dickey Fuller Test) and Co-Integration test developed by Engle and Granger (1987), allowing for an unknown number of breaks. The Error Correction Model (ECM) has been used to analyze the long-run and short-run equilibrium relationship among the selected sectoral indices. Our results indicate that there is long run and short run relationship among the sectoral indices.