Open Access Subscription Access
An Empirical Investigation of the Volatility Spill-over and Asymmetries between Nifty Index and Rupee- Dollar Exchange Rate
The present study is an attempt to investigate the conditional volatility of returns of the two major segments of Indian financial markets viz. Re/$ Exchange Rate and Nifty Index Stock Index using GARCH (p,q) methodology. The period of the study has been taken to be April 2007-March 2017 and the data has been collected as monthly closing prices of the two variables, namely rupee dollar exchange rate and NSE Nifty. The analysis has been carried on first differenced (log transformed) prices. For studying the spill-over of volatility from a market to another, squared residuals (after standardization) from another market have been included as variance regressors. Further to find out whether or not there was any asymmetric returns of the markets under study, Threshold GARCH (T-GARCH) Model has been employed. The results of the study revealed the presence of conditional volatility of returns. The optimal model was identified as ARCH (1) when Re/$ Exchange Rate was the dependent variable while it was GARCH (1,1) when Nifty Index was taken as dependent variable. The bi-directional volatility spill-over (contemporaneous) was clearly evident by the two models and the same was captured by the variance regressors i.e. the standardized squared residuals. Further the results showed no sign of any asymmetry in volatility as reflected by the T-GARCH coefficients.
Volatility Spill-over, AR (1)-GARCH (p,q), T-GARCH, Asymmetric Returns, B-P-G Heteroscedasticity Test
JEL classification: G1, G15.
- Kim K. Dollar Exchange Rate and Stock Price: Evidence from Multivariate Co-integration and Error Correction Model. Review of Financial Economics. 2003; 12(3):301313. https://doi.org/10.1016/S1058-3300(03)00026-0
- King MA and Wadhwani S. Transmission of Volatility between Stock Markets. The Review of Financial Studies. 1990; 3(1):5-33. https://www.jstor.org/stable/2961954
- Balli F, Hajhoj HR, Basher SA and Ghassan H. B. An analysis of returns and volatility spill-overs and their determinants in emerging Asian and Middle Eastern countries. International Review of Economics and Finance.2015; 39:311-325. https://doi.org/10.1016/j.iref.2015.04.013
- Hilliard JE. The relationship between equity indices on world exchanges. Journal of Finance. 1979; 34(1):103–114. https://www.jstor.org/stable/2327147
- Dornbusch R and Fischer S. Exchange rates and the current account. The American Economic Review. 1980; 70(5):960971. https://www.jstor.org/stable/1805775
- Branson WH. A model of exchange-rate determination with policy reaction: evidence from monthly data. 1983. https://doi.org/10.3386/w1178
- Frankel JA. Monetary and portfolio balance models of exchange rate determination. In: Bhandari, J.S., Putnam, B.H. (Eds.). Economic Interdependence and Flexible Exchange Rates. MIT Press, Cambridge, MA; 1983.
- Solnik B. Using financial prices to test exchange rate models: A note. The journal of Finance. 1987; 42(1):141-149.
- Kutty G. The relationship between exchange rates and stock prices: the case of Mexico. North American Journal of Finance and Banking Research. 2010; 4(4):1-11.
- Aggarwal R. Exchange Rates and Stock Prices: A Study of the US Capital Markets under Floating Exchange Rates. Akron Business and Economic Review. 1981; 12(3):7-12.
- Soenen L. and Hennigar E. An Analysis of Exchange Rates and Stock Prices: The US Experience between 1980 and 1986. Akron Business and Economic Review. 1988; 19:7-16.
- Bahmani-Oskooee M and Sohrabian A. Stock Prices and the Effective Exchange Rate of the Dollar. Applied Economics. 1992; 24(4):459-464. https://doi.org/10.1080/00036849200000020
- Ajayi RA and Mougoue M. On the Dynamic Relation between Stock Prices and Exchange Rates. Journal of Financial Research. 1996; 19(2):193-207. https://doi.org/10.1111/j.1475-6803.1996.tb00593.x
- Ajayi RA, Friedman J and Mehdian SM. On the Relationship between Stock Returns and Exchange Rates: Tests of Granger Causality. Global International Journal of Business and Economics. 1998; 9(2):241-251. https://doi.org/10.1016/S1044-0283(98)90006-0
- Nieh CC and Lee C-F. Dynamic Relationships between Stock Prices and Exchange Rates for G-7 Countries. Quarterly Review of Economics and Finance. 2001; 41(4):477-490.
- Engle RF. Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica: Journal of the Econometric Society. 1982; 50(4):987-1007. https://www.jstor.org/stable/1912773
- Bollerslev T. Generalized autoregressive conditional heteroskedasticity. Journal of econometrics. 1986; 31(3):307-327. https://doi.org/10.1016/0304-4076(86)90063-1
- Polisetty A. Kumar P and Kurian JS. Influence of Exchange Rate on BSE Sensex and NSE Nift. IOSR Journal of Business and Management. 2016; 18(9):10-15. Available at www.iosrjournals.org
- Poornima DS and Ganeshwari M. Relationship between Exchange Rates and Stock Market Index: Evidence from the Indian Stock Market. International Journal of Science and Research (IJSR). 2016; 5(10):16-18.
- Agrawal G, Srivastav AK and Srivastava A. A study of exchange rates movement and stock market volatility. International Journal of Business and Management.
- ; 5(12):62-73. https://doi.org/10.5539/ijbm.v5n12p62 21. Gulati D and Kakhani M. Relationship between stock market and foreign exchange market in India: An empirical study. Pacific Business Review International. 2012; 5(5): 66-71.
- Mozumder N, De Vita G, Kyaw S and Larkin C. Volatility spill-over between stock prices and exchange rates: New evidence across the recent financial crisis period. Economic Issues. 2015; 20(1):43-64.
- Arifin, J and Syahruddin N. Volatility spill-overs between equity and currency markets in ASEAN-5 countries during crises. In Proceedings of 13th International Conference on Banking and Finance: Lessons Learned from the Financial Crises. 2011; 12:13-22.
- Beer F and Hebein F. An Assessment of the stock market and exchange rate Dynamics in industrialized and emerging markets. International Business and Economics Research Journal. 2008; 7(8):59-70. https://doi.org/10.19030/iber.v7i8.3283
- Mishra AK, Swain N and Malhotra DK. Volatility spillover between stock and foreign exchange markets:
- Indian evidence. International Journal of Business. 2007; 12(3):343-359.
- Qayyum A and Kemal AR. Volatility Spill-over between the Stock Market and the Foreign Market in Pakistan. Working Papers and Research Reports. 2006
- Yang SY and Doong SC. Price and volatility spill-overs between stock prices and exchange rates: empirical evidence from the G-7 countries. International Journal of Business and Economics. 2004; 3(2):139-153.
- Nath, GC and Samanta GP. Dynamic relation between exchange rate and stock prices: a case for India. In 39th Annual Conference paper of Indian Econometric Society also published in NSE News; 2003 February.
- Apte, P. The interrelationship between the stock markets and the foreign exchange market. 2001. Available at https://papers.ssrn.com/sol3/papers.cfm
- Websites for data: BSE(www.bseindia.com), NSE(nseindia.com)
- Shin Y and Schmidt P. The KPSS stationarity test as a unit root test. Economics Letters. 1992; 38(4):387-392. https://doi.org/10.1016/0165-1765(92)90023-R
- Breusch TS and Pagan AR. A simple test for heteroscedasticity and random coefficient variation. Econometrica: Journal of the Econometric Society. 1979; 47(5):1287-1294. https://www.jstor.org/stable/1911963
Abstract Views: 7
PDF Views: 0