On the Relationship between Stock Prices and Exchange Rates for India

Narayan, Paresh Kumar

doi:10.1142/s0219091509001630

Cited by 15 publications

(7 citation statements)

References 33 publications

(24 reference statements)

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“…Choi and Fang (2009) confirm the results of Chen et al (2004). Narayan (2009) investigates the impact of the Indian rupee depreciation on the Indian stock market returns using daily data and finds that a depreciation of the Indian rupee raises stock return volatility. However, an appreciation causes higher stock return and lower return volatility.…”

Section: Introductionsupporting

confidence: 67%

Linkages between Thai stock and foreign exchange markets under the floating regime

Jiranyakul

2012

Journal of Financial Economic Policy

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Purpose -The purpose of the present study is to directly examine the relationship between bilateral exchange rate and stock market index in a bivariate framework during the period of the floating exchange rate regime in Thailand. Design/methodology/approach -The monthly data used in this study are the stock market index or stock prices from the Stock Exchange of Thailand, and the nominal bilateral exchange rate in terms of baht per US dollar from the Bank of Thailand. The period covers July 1997 to June 2010 with 156 observations. This is the period that the country switched from fixed to floating exchange rate regime. The stock market return is calculated by the percentage change of stock market index (or stock prices) while the exchange rate return is the percentage change of the nominal bilateral exchange rate. Three estimation methods are used to capture the interaction between stock and foreign exchange markets: bounds testing for cointegration, non-causality test, and the two-step approach with a bivariate GARCH model and Granger causality test. Findings -The results of the present study show that bounds testing for cointegration does not detect the long-run relationship between stock prices and exchange rate. In addition, the non-causality test fails the diagnostic test for multivariate normality in the residuals of the estimated VAR model. However, the two-step approach adequately detects the linkages between the stock and foreign exchange markets. It is found that there exists positive unidirectional causality running from stock market return to exchange rate return. The exchange rate risk causes stock return to fall as expected. Moreover, there are bidirectional causal relations between stock market risk and exchange rate risk, but in different directions. Research limitations/implications -Since a rising trend in the risk in the foreign exchange market causes stock return to fall, both domestic and foreign investors should be aware of the risk or uncertainty in the foreign exchange market because it can cause their portfolio return to fall. For policymakers, reducing exchange rate risk cannot be done without the associated costs from a rising risk in the stock market. Originality/value -This study provides an evidence of volatility (or risk) spillovers in stock and foreign exchange markets. In addition, the risk in foreign exchange market that adversely affects return in the stock market is an expected phenomenon under the floating exchange rate regime.

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Section: Introductionsupporting

confidence: 67%

Linkages between Thai stock and foreign exchange markets under the floating regime

Jiranyakul

2012

Journal of Financial Economic Policy

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“…Mukherjee and Naka (1995) tried to analyze the dynamic relation between six macroeconomic variables and Japanese stock market returns and found that the cointegration relation existed and positive relationship was found between the Japanese industrial production and stock return. Abdalla and Murinde (1997), Nath and Samanta (2004) and Narayan (2009) investigate the interactions between exchange rates and stock prices. While Abdalla and Murinde did the research for India, Korea, Pakistan and the Philippines and reported unidirectional causality from exchange rates to stock prices in all countries except the Philippines, Nath examines the extent of integration between foreign exchange and stock market in India during the liberalization era using Granger’s causality test in VAR framework and Gweke’s Feedback Measures and found a very poor causal link between returns in foreign exchange and capital markets as per the results of Granger causality test.…”

Section: Literature Reviewmentioning

confidence: 99%

Stock Market Performance and Macroeconomic Factors: The Study of Indian Equity Market

Tripathi

Seth

2014

Global Business Review

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There has been an extensive debate on the relationship between real economy and stock market performance especially in the context of emerging markets. This article examines the causal relationships between the stock market performance and select macroeconomic variables in India, using monthly data from July 1997 to June 2011. We use factor analysis, ADF and PP Unit root tests, Regression, ARCH model, Granger causality and Johansen Co-integration test for data analysis. Impulse Response analysis has also been performed to check the response of stock market to shocks created in the real economy. We find a significant correlation among stock market indicators and macroeconomic factors. We identified three principal factors through Factor analysis viz Inflation, Interest rate and Exchange rate. The overall explanatory power of the regression model is 23.8%, 23.3% and 16.9% respectively for Sensex, Market capitalization and Market Turnover. There is uni directional causality from stock market to real economy. We find five co-integrating relationships between stock market and macro-economic variables. These results suggest that the stock prices movement is not only the result of behaviour of key macroeconomic variables but it is also one of the important reasons of movement in other macro dimension in the economy.

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“…While much of the earlier literature focussed on a one-way relationship between stock prices and exchange rates, more recent literature, starting with Granger et al (2000) recognises the joint endogeneity of the two variables; see also Kim (2003), Ramaswamy and Yeung (2005), Richards, Simpson and Evans (2009) and Aydemir and Demirhan (2009). Other extensions have been to more sophisticated methods such as those incorporating non-linearities (Chang et al, 2009, Ismail andIsa, 2009), dynamic conditional correlations (Wong and Li, 2010) and volatility (Zhao, 2010, Narayan, 2009. Despite this wide-ranging literature, there is no consensus on the sign and magnitude of the effect of changes in stock prices on exchange rates and vice versa.…”

Section: Background and Literaturementioning

confidence: 99%

Stock Prices and Exchange Rates in Australia: Are Commodity Prices the Missing Link?

Groenewold

Paterson

2013

Australian Economic Papers

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The relationship between stock prices and exchange rates is an important topic of long standing. But there are still significant gaps in our knowledge of this area, not least, the ambiguity about the sign of the effect of a change in one of these variables on the other. While there are many possible reasons for this ambiguity, one which we explore in the Australian context in this paper is the omission of commodity prices. We show that a bivariate relationship which omits commodity prices performs badly but that once commodity prices are added to the relationship, our results are plausible and robust. We also throw light on the commodity-currency issue and show that the link from the exchange rate to commodity prices is stronger and more consistent than that in the opposite direction.

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On the Relationship between Stock Prices and Exchange Rates for India

Cited by 15 publications

References 33 publications

Linkages between Thai stock and foreign exchange markets under the floating regime

Linkages between Thai stock and foreign exchange markets under the floating regime

Stock Market Performance and Macroeconomic Factors: The Study of Indian Equity Market

Stock Prices and Exchange Rates in Australia: Are Commodity Prices the Missing Link?

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