Abstract
Purpose: The purpose of this paper is to find out the relationship between price of Gold, price of Crude Oil, Exchange Rate of India, and India’s stock market. The research has been done on Pre-COVID time periods to analyse the relationship in scenarios like pre-global financial crisis, during crisis and post crisis. The authors incorporate the data from pre-crisis phases i.e., 2005 to 2019, to find out the relationship between the variables using Granger causality test, Johansen’s Cointegration, and Vector Autoregression. To study the spill-over effect on India’s stock market, regression has been used. The empirical results indicate that for the Pre-Crisis and Post-Crisis periods, “Gold” does granger cause “USDINR”, for all three periods “Crude oil” does granger cause “Gold”, for the crisis and post crisis periods “Gold” does granger cause “Crude oil”, for the post crisis period “USDINR” does granger cause “Crude oil”. No other causality relationship was established with the help of this empirical analysis. Johansen’s cointegration test revealed that no cointegration exists amongst the three variables. The impact of exchange rate on India’s stock market has changed as compared to the previous time periods. Exchange rate was inversely related to the stock markets for the Pre-Crisis and Crisis periods and is directly related to the stock market for the Post-Crisis period. This study adds to the existing literature on the variables, by using phase wise data and performing empirical analysis to find out the relationship between the variables. Not many literature demonstrate together the relationship among these three variables in three different periods. This is a significant gap that the study aimed to address.
Highlights
Integration of financial markets with the world economy has been a prominent feature of the 21st century
From the above table we can observe that Gold I(1) at a lag of 1 has a strongly exogenous influence on USDINR at I(1) as the t-stat stands at 3.24132, which implies that a percent increase in Gold I(1) at lag 1 will lead to a increase of 0.0208% for the USDINR I(1)
From the above table we can observe that Gold I(1) at a lag of 2 has a weakly exogenous influence on USDINR at I(1) as the t-stat stands at -1.33923
Summary
Integration of financial markets with the world economy has been a prominent feature of the 21st century. This was evident in early years of 21st century when the stock market, real estate and the commodity market were showing signs of recovery after the Asian Financial crisis during late 1990s. World economy felt a faster integration of markets can take place through interaction of commodity markets, stock markets and exchange rate. Investors in Indian economy showed signs of encouragement and went on investing in commodity markets and financial markets assuming these are currently safe routes to multiply their assets and in turn help the Indian economy to integrate and grow. With the advent of global financial crisis in 2007-08 their hopes were dashed.With the recessionary trends and apprehensions in the economy, investors were forced to detach themselves temporarily from such activities and withdrew their capital from the respective stock markets and started investing in the safe haven i.e. gold or other alternative investments
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