The issue of financial integration of emerging stock markets has generated a great deal of interest among practitioners and academic researchers. Over the past two decades, a significant volume of research has been concerned with the integration of the world’s major stock markets. The emerging markets in some developing countries have achieved considerable improvements over the past two decades. Several factors, such as the conduct of sound macroeconomic policies, stock market reforms, privatization, and financial liberalization, have played vital roles in these improvements. India is one of the countries with an expanding stock market that is increasingly attracting funds from the Foreign Institutional Investors (FIIs). In particular, deregulation and market liberalization measures, rapid development in the communication technology and computerized trading systems, and increasing activities of multinational corporations have accelerated the growth of Indian capital market. One of the main reasons for this study focusing on the emerging markets is because there is an increase in funds flowing from the developed markets towards the developing markets, and therefore these markets are becoming important in terms of portfolio management. The study uses daily stock price indices of the emerging countries, namely, India, Malaysia, Taiwan, China, South Korea; and the developed markets, namely, the US, the UK, Germany, Singapore, Hong Kong, and Japan. This study covers the period from April 2000 to March 2007 and uses unit root and cointegration tests to examine the relationships between the NSE and the stock markets in the emerging markets and the developed markets. All the stock prices are analyzed both individually and collectively to test for market efficiency. Unit roots in stock prices are found. Pair-wise cointegration tests indicate that there is no evidence of cointegration among the stock prices. The findings suggest that the stock prices in major Asian markets and the United States are weak-form of efficiency, individually and collectively, in the long run. It also implies that international investors can achieve substantial risk diversification benefits in Indian markets.

Developing countries face the problems of low capital and low growth and hence seek external sources to strengthen their economy. Foreign capital investment fills the resource gap of the developing countries. Globalization has brought financial integration among the nations. The gradual lifting of restrictions on capital flows and relaxation of exchange control in many countries have accelerated integration among the world's capital markets (Khan Masood Ahmad et al., 2005). The technological developments in communication and trading systems and attaining such technology at cheaper cost have paved the way for quick market integration (Golaka C Nath and Sunil Verma, 2003). Integration is a process by which segmented markets become open and unified so that participants enjoy unimpeded access to international trade and finance (Nalini Prava Tripathy, 2005). Financial integration leads to rapid flow of funds from `less returns markets' to `high returns markets', and in this process it brings about equality in returns. Financing and investing decisions by individuals and corporates, particularly multinationals, are greatly influenced by the perceived degree of market integration.

If stock markets move together then investing in various markets would not generate any long-term gain to portfolio diversification; whereas if these markets are independent, investors in these countries can invest in different markets of the region to diversify their portfolio. The authorities in the region need not worry about any contagious effect if one market experiences any turmoil. The existence of international portfolio diversification was carried out by Grubel (1968), who expounded the benefits of international portfolio diversification. Hence, understanding the behavior of the inter-linkage among markets is essential for international financial management, especially in the context of international portfolio diversification and hedging (Deepak Chawla et al., 2005).

Cointegration and Correlation Among Indian, Foreign Institutional Investors, FIIs, Financial liberalization, Macroeconomic policies, Communication technology, International financial management, Portfolio diversification, Cross-correlation, Engle-Granger Augmented Dickey-Fuller Test, EG-ADF, Global Stock Markets.