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RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

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1.) RESEARCH METHODOLOGY

Problem Statement

In the last two decades, globalization, interlinkages of the capital markets, gradual

eradication of capital inflow barriers and the implementation of more flexible exchange

rate mechanism in developed as well as transition economies, created a systematic

interdependency between and within the stock and foreign exchange markets. The

individual have very vague idea about such relationship between two markets. Thus,

investigating the relationship between stock prices and exchange rates has received

unprecedented attention in the literature. A number of studies have empirically examined

the relationship between the stock and foreign exchange markets. This study explores the

evidence of relationship between exchange rates and stock prices and also lead lag

relationship between exchange rates and stock prices. We use a three-step framework for

examining dynamic relationships between exchange rates and stock index.

Literature Review

Apte (2001) investigated the relationship between the volatility of the stock market and

the nominal exchange rate of India by using the EGARCH specifications on the daily

closing USD/INR exchange rate, BSE 30 (Sensex) and NIFTY-50 over the period 1991

to 2000. The study suggests that there appears to be a spillover from the foreign exchange

market to the stock market but not the reverse.

Bhattacharya and Mukharjee (2002) studied the nature of causal relation between the

stock market, exchange rate, foreign exchange reserves and value of trade balance in

India from 1990 to 2001 by applying the co-integration and long-run Granger Non-

causality tests. The study suggests that there is no causal linkage between stock prices

and the three variables under consideration.

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To examine the dynamic linkages between the foreign exchange and stock markets for

India, Nath and Samanta (2003) employed the Granger causality test on daily data during

the period March 1993 to December 2002. The empirical findings of the study suggest

that these two markets did not have any causal relationship. When the study extended its

analysis to verify if liberalization in both the markets brought them together, it found no

significant causal relationship between the exchange rate and stock price movements,

except for the years 1993, 2001 and 2002 during when a unidirectional causal influence

from stock index return to return in forex market is detected and a very mild causal

influence in the reverse direction is found in some years such as 1997 and 2002.

Yamini Karmarkar and G Kawadia tried to investigate the relationship between RS/$

exchange rate and Indian stock markets. Five composite indices and five sectoral indices

were studied over the period of one year: 2000. the results indicated that exchange rate

has high correlation with the movement of stock markets.

Research Objectives

The present study is being contemplated with the following specific objectives:

i) Investigating the relationship between the foreign exchange market and stock market

in India. To see that weather there is a significant relationship or dynamic linkage

between the two markets.

ii) To find out which variable is leading and which variable is lagging. The lead-lag

relationship illustrates how well the two markets are linked, and how fast one market

reflects new information from the other. If relation between foreign exchange market and

stock market exist, then it is possible that investor may use this information to predict the

exchange rate movement or indices movement.

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1.) RESEARCH METHODOLOGY Problem Statement In the last two decades, globalization, interlinkages of the capital markets, gradual eradication of capital inflow barriers and the implementation of more flexible exchange rate mechanism in developed as well as transition economies, created a systematic interdependency between and within the stock and foreign exchange markets. The individual have very vague idea about such relationship between two markets. Thus, investigating the relationship between stock prices and exchange rates has received unprecedented attention in the literature. A number of studies have empirically examined the relationship between the stock and foreign exchange markets. This study explores the evidence of relationship between exchange rates and stock prices and also lead lag relationship between exchange rates and stock prices. We use a three-step framework for examining dynamic relationships between exchange rates and stock index. Literature Review Apte (2001) investigated the relationship between the volatility of the stock market and the nominal exchange rate of India by using the EGARCH specifications on the daily closing USD/INR exchange rate, BSE 30 (Sensex) and NIFTY-50 over the period 1991 to 2000. The study suggests that there appears to be a spillover from the foreign exchange market to the stock market but not the reverse. Bhattacharya and Mukharjee (2002) studied the nature of causal relation between the stock market, exchange rate, foreign ...
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