The Dynamics of Sectoral Integration and Strategic Investment Diversification: Empirical Insights from NSE Sectoral Indices

Abstract

This study investigates the dynamic relationships and diversification potential among sectoral indices of the National Stock Exchange (NSE) with a specific focus on the Nifty 50 index over the period 2014 to 2024. Employing rigorous econometric techniques, the analysis begins with the Augmented Dickey-Fuller (ADF) test to examine the stationarity of time series data, followed by Johansen’s cointegration approach to explore long-run equilibrium relationships. The study further applies the Vector Error Correction Model (VECM) to capture short-term adjustments and long-term dynamics, especially between Nifty 50 and sectoral indices such as IT, FMCG, Pharma, Auto, Energy, and Banking. Empirical results reveal that while all indices are individually non-stationary at levels and become stationary at first differences, only the Nifty 50 and IT index pair exhibit a statistically significant cointegrating relationship. The VECM results show that the Nifty 50 index adjusts significantly to deviations from long-run equilibrium, while the IT index does not, suggesting an asymmetric causal structure. These findings underscore the centrality of the IT sector in influencing broader market movements and highlight the limited scope for diversification within the NSE due to strong sectoral linkages. The study offers key implications for portfolio managers and passive investors by advocating for sectoral rebalancing strategies and monitoring systemic sectoral shocks.