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Abstract
With increasing globalisation and integration of national stock exchanges, for the global investor, the portfolio risk increases not only from the local stock market volatility but also in the exchange rate risk. This paper examines the exchange rate volatility effect on volatility in stock market return from India’s perspective for the period January 2010 to December 2015, applying ARCH and GARCH estimation. The daily data of the BSE SENSEX returns, exchange rates of US dollar/rupee, British pound/rupee, Euros/rupee are used. It is estimated that the Euro/rupee exchange rate volatility has a significant positive effect on the BSE SENSEX return volatility, while the effect of the US dollar/rupee and British pound/rupee exchange rate the volatilities are insignificantly negative. The larger GARCH parameter over the ARCH term indicates that the own lagged values of the stock return cause more volatility in stock returns than the innovations. There exists a highly persistent effect of shocks to the BSE SENSEX return and the volatility effect wanes only slowly
Highlights
Globalisation has resulted in numerous global links throughout the world bringing every nation close to each other and the modern world is seen as a single global village
This paper empirically investigates the effect of exchange rate volatility on stock market return volatility from India’s perspective
The daily time series data for the BSE SENSEX stock market index and exchange rates of US dollar/rupee, British pound/rupee, Euros/rupee over a period of six years from January 2010 to December 2015 is used in the empirical analysis
Summary
Globalisation has resulted in numerous global links throughout the world bringing every nation close to each other and the modern world is seen as a single global village. This current wave of globalisation has expanded the markets for products and economic integration and the global integration of financial institutions and financial markets. Increasing international equity flows create a higher demand for and supply of currencies in which international equity prices are denominated leading to some degree of interdependence between stock market and exchange rate changes. A byproduct of such global integration of financial markets is that the vulnerability of the global financial instituitons increases The national economies are highly vulnerable to the volatilities in the international financial markets (Karunanayake, Valadkhani and O'Brien, 2010)
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