FX Volatility Impact on Indian Stock Market: An Empirical Investigation

Aravind M.

Vision, 2017, vol. 21, issue 3, 284-294

Abstract: Examining the interrelationship between currency market volatility and stock market volatility will create abundant trading opportunities to the investors irrespective of whether the return of one market is moving up or down. This research work intended to examine how the exchange rate volatility between Indian rupee and foreign currencies, such as US dollar, euro, Japanese yen and British pound, can influence the return and volatility of the Indian stock market. The research data extensively cover daily price observations of foreign currencies as well as Nifty index for 1500 days. The generalized autoregressive conditional heteroskedasticity (GARCH) is used for modelling foreign exchange (FX) rates volatility and its impact across Indian stock market. The mean equation of the model confirms that any appreciation in Indian rupee will lead to channelization of more funds towards stock market. Further, it is validated that the volatility shocks between the stock market and currency market are quite persistent. Besides the model also points that the volatility attributes are very strong between US dollar and Nifty. The Granger causality test wrap up with a finding that the volatility shocks of British pound have a causal relation with Nifty return. The result of this study will help the domestic as well as foreign investors in favour of portfolio diversification decisions. The study also spots that the policymakers can indirectly intervene into stock market through monitory policy measures.

Keywords: FX Volatility; Nifty Return; Granger Causality Test; Generalized Autoregressive Conditional Heteroskedasticity (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:sae:vision:v:21:y:2017:i:3:p:284-294

DOI: 10.1177/0972262917716760

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