Volatility Spillover and Dynamic Connectedness Between US and Indian Stock Markets: Evidence from S&P 500 and NIFTY 50 (2023–2025)

Abstract

Introduction: Understanding volatility transmission between developed and emerging equity markets is essential for investors, policymakers, and researchers. The interdependence between the US and Indian stock markets has increased due to globalization, capital mobility, and financial integration. This study examines volatility dynamics and spillover effects between the S&P 500 and NIFTY 50 indices using recent daily data. It contributes to the literature by analyzing persistence, asymmetric volatility, and dynamic correlations to assess diversification potential and financial market linkages.

Objectives: To examine volatility persistence and clustering in the S&P 500 and NIFTY 50 indices. To analyze asymmetric volatility effects using EGARCH models. To evaluate volatility spillover and transmission mechanisms between the two markets. To assess dynamic correlations and diversification implications.

Methods: Daily closing price data from January 1, 2023, to December 31, 2025 (1,513 observations) were analyzed. Stationarity and normality were tested using standard statistical tests. Vector Autoregression (VAR) was applied to examine interdependence. Volatility dynamics were estimated using GARCH (1,1) and EGARCH models to capture persistence and leverage effects. Forecast Error Variance Decomposition (FEVD) and Granger causality tests were used to identify spillover direction. Dynamic Conditional Correlation (DCC) and rolling correlation analysis were conducted to assess time-varying relationships.

Results: Results show significant non-normality with fat-tailed distributions. Volatility persistence is higher in NIFTY 50 (α+β=1.072) compared to S&P 500 (α+β=0.534), indicating slower mean reversion. EGARCH results confirm significant leverage effects in both markets, where negative shocks increase volatility more than positive shocks. FEVD reveals unidirectional volatility spillover from the S&P 500 to NIFTY 50, with US shocks explaining 14.3% of Indian market variance. Dynamic correlations remain low on average but increase during periods of market stress. Granger causality results indicate weak return-level linkages but significant volatility transmission. Overall, diversification benefits exist during stable periods but weaken during crises.

Conclusions: The study confirms significant volatility persistence, asymmetric effects, and unidirectional spillover from the S&P 500 to NIFTY 50. While diversification benefits exist during stable periods, increased correlations during crises reduce diversification effectiveness, highlighting stronger global market integration and risk transmission.