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.
1
,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.
2
,Hypothesis
H0: There is no significant relation between stock prices and exchange rates
H1: There is significant relation between stock prices and exchange rates
Research Design
The study type is Descriptive because this research helps to find out the meaning out of
the secondary data, but not the cause-and-effect (causal) linkages among its different
elements.
The Sample
The sample population of the study comprises of daily closing price, for of BSE Sensex,
CNX Nifty and exchange rates of Rupee/Dollar are considered for analyzing.
Sources of Data
Primary Data-nil
Secondary sources- The study is based on the secondary data collected from the official
website of BSE, NSE and Exchange Rate data from exchangeate.com.
Period of the Study
Daily closing values of BSE Sensex, CNX Nifty and exchange rates of Rupee/Dollar are
considered from 1-1-2001 to 31-3-2009.
3
, Statistical Tools used in the study
Augmented Dickey-Fuller test (Unit Root Test for stationarity of data)
Johnson co integration test (Test for long run relationship)
Cross Correlation (Test for short run relationship)
Scope of the study
The study includes only one currency pair i.e. INR/USD for the representation of the
forex market while the two major stock markets of India are covered. Thus the relation
and effects of other currencies is out of the preview of the research.
Benefits
The determination of relationship between the foreign exchange market and stock market
would help the students to increase their understanding about these markets. It would also
provide a platform for participants to enhance their views about the relationship between
the two markets.
Limitations
Unavailability of intra-day minute to minute data of both the markets.
The study is limited to period of eight years.
Only one pair of USD/INR is used.
4
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.
1
,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.
2
,Hypothesis
H0: There is no significant relation between stock prices and exchange rates
H1: There is significant relation between stock prices and exchange rates
Research Design
The study type is Descriptive because this research helps to find out the meaning out of
the secondary data, but not the cause-and-effect (causal) linkages among its different
elements.
The Sample
The sample population of the study comprises of daily closing price, for of BSE Sensex,
CNX Nifty and exchange rates of Rupee/Dollar are considered for analyzing.
Sources of Data
Primary Data-nil
Secondary sources- The study is based on the secondary data collected from the official
website of BSE, NSE and Exchange Rate data from exchangeate.com.
Period of the Study
Daily closing values of BSE Sensex, CNX Nifty and exchange rates of Rupee/Dollar are
considered from 1-1-2001 to 31-3-2009.
3
, Statistical Tools used in the study
Augmented Dickey-Fuller test (Unit Root Test for stationarity of data)
Johnson co integration test (Test for long run relationship)
Cross Correlation (Test for short run relationship)
Scope of the study
The study includes only one currency pair i.e. INR/USD for the representation of the
forex market while the two major stock markets of India are covered. Thus the relation
and effects of other currencies is out of the preview of the research.
Benefits
The determination of relationship between the foreign exchange market and stock market
would help the students to increase their understanding about these markets. It would also
provide a platform for participants to enhance their views about the relationship between
the two markets.
Limitations
Unavailability of intra-day minute to minute data of both the markets.
The study is limited to period of eight years.
Only one pair of USD/INR is used.
4
