A Study of Exchange Rates Movement and Stock Market Volatility

Abstract

This paper analyzes the relationship between Nifty returns and Indian rupee-US Dollar Exchange Rates. Severalstatistical tests have been applied in order to study the behavior and dynamics of both the series. The paper alsoinvestigates the impact of both the time series on each other. The period for the study has been taken fromOctober, 2007 to March, 2009 using daily closing indices. In this study, it was found that Nifty returns as well asExchange Rates were non-normally distributed. Through unit root test, it was also established that both the timeseries, Exchange rate and Nifty returns, were stationary at the level form itself. Correlation between Nifty returnsand Exchange Rates was found to be negative. Further investigation into the causal relationship between the twovariables using Granger Causality test highlighted unidirectional relationship between Nifty returns andExchange Rates, running from the former towards the latter.