The dynamic linkage between exchange rate, stock price and interest rate in India

Malepati Jayashankar and Badri Rath

Studies in Economics and Finance, 2017, vol. 34, issue 3, 383-406

Abstract: Purpose - The purpose of this study is to examine linkage between exchange rate, stock return and interest rate for India. Design/methodology/approach - Using monthly data from January 2000 to December 2014, this study has scrutinized the linkage between exchange rate, stock return and interest rate using maximum overlap discrete wavelet transform (MODWT) which is very much appropriate when the variables are discrete in nature. Findings - Our major findings indicate that the empirical relationship between these variables is not significant at lower scales. As we go on higher scales, there is a clear linkage between them, and three markets are associated with each other. Moreover, the direction and type of the relationship depends on the frequency bands, and finally with the help of Granger causality tests, we established a lead/lag relationship between stock price, exchange rate and interest rate. Research limitations/implications - The linkage between stock market, foreign exchange market and money market in case of emerging countries like India is more relevant because negative or positive shocks affecting one market may be transmitted quickly to another through contagious effect. Originality/value - Little attention has been given to examine the link between stock return, exchange rate and interest rate in India. This study adopts a more sophisticated MODWT approach for examining the cross-correlation and causality.

Keywords: India; Exchange rate; Stock price; Interest rate; Modified overlap discrete wavelet transform (MODWT) (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-02-2016-0043

DOI: 10.1108/SEF-02-2016-0043

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