Return, Volatility and Risk Spillover from Oil Prices and the US Dollar Exchange Rate to the Indian Industrial Sectors

Abstract

This article examines the return, volatility, upside risk and downside risk spillover effects from crude oil prices and the US$/INR exchange rate to the major Indian industrial sectors using Hong’s (2001) approach. We make use of the generalised autoregressive conditional heteroskedasticity (GARCH) class of models based on the generalised error distribution (GED) to estimate extreme upside and downside Value-at-Risk (VaR). Our empirical results provide evidence of a significant return spillover effect from the crude oil market to the energy, FMCG and pharmaceutical (pharma) sectors and from the US$/INR exchange rate to the pharma sector. We also find evidence of significant volatility spillover from crude oil prices to the energy, fast-moving consumer goods (FMCG) and multinational corporation (MNC) sectors and from the US$/INR exchange rate to the energy and pharma sectors. Moreover, we find significant upside risk spillover from crude oil prices and the US$/INR exchange rate to all the industrial sectors (except for the energy sector with respect to the US$/INR exchange rate); significant downside risk spillover from crude oil prices to the energy, FMCG, pharma and MNC sectors and from the US$/INR exchange rate to only the pharma sector. In addition, we observe two-way downside risk spillover between crude oil prices and the US$/INR exchange rate.