Inter-linkage between Indian Stock, Commodity and Foreign Exchange Markets

Abstract

Study of market inter-dependency helps the investors, financial managers, policy makers and other stake holders to formulate their financial strategies according to the direction and strength of dependence of one market with another market. In this study we analyse the integration and inter-relationship among commodity, stock and foreign exchange markets in India. This study extends other studies by including all indices of commodity market since their birth till recent days, major stock market indices of India and exchange rates of rupee against US dollar. We use cross- correlation, residual based co-integration tests, Granger causality test and AR-EGARCH (p, q) models to capture the inter-linkage between the markets. The study found bidirectional relation between some of the commodity indices and stock indices and strong unidirectional relationship between commodity and foreign exchange market.