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Return and volatility spillover between stock price and exchange rate: Indian evidence

Sayantan Majumder () and Ranjanendra Narayan Nag

International Journal of Economics and Business Research, 2015, vol. 10, issue 4, 326-340

Abstract: Return and volatility spillover between the stock market and the foreign exchange market have been studied for the Indian economy, over the period of April 2003 to September 2013. Bivariate EGARCH model has been used for this purpose, which can aptly capture the asymmetric responses to the shocks. Return and volatility spillover from the stock market to foreign exchange market has been found to be statistically significant. The paper further dissect the sample period between pre-crisis (2003-2007) and post-crisis (2008-2013) period and the analysis reveals that the strength of volatility spillover has become stronger in the post-crisis period. Policies pertaining to stock market stabilisation can reduce the exchange rate volatility as well. However, managing exchange rate fluctuation is found to be an effective way of dampening stock market volatility at the time of stress only.

Keywords: stock markets; foreign exchange markets; spillover effects; return spillover; volatility spillover; stock prices; exchange rates; India; EGARCH models; stock market stabilisation; exchange rate volatility. (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:ids:ijecbr:v:10:y:2015:i:4:p:326-340