Abstract
This paper looks at the relationship between Nifty returns and US Dollar - Indian Rupee Exchange Rates. The study looks into the causal relationship between Nifty returns and exchange rate using Granger Causality test. It took daily data covering the period from January, 2009 to June, 2019. In this study, it was found that both variables were non–normally distributed. With the help of Unit Root Test, it was also verified that Nifty returns as well as Exchange rate, were stationary at the first difference form. Using Granger Causality test it is proved there was a bidirectional relationship between Nifty returns and Exchange rates. From the further investigation it is evident there is a causality running from exchange rate return to stock market return. Finally, employing impulse response function it found that there is a negative relationship among the variables.
Highlights
Share price refers to the market value of a firm’s single stock on the day it trades
Charles Adjasi, Simon K Harvey and Daniel Agyapong (2008) analyse the effect of exchange rate volatility on the Ghana stock exchange using EGARCH model. They found a negative relationship between exchange rate volatility and stock market returns, i.e. a depreciation in the local currency leads to an increase in the stock market returns
The study is conducted to analyse the effect of exchange rate volatility on stock market volatility
Summary
Share price refers to the market value of a firm’s single stock on the day it trades. Talking in the Indian context, a positive move in the exchange rate, that is rupee gaining strength against US Dollar, would have substantial impact over the financials of companies with considerable import bills to be met with their overseas partner. The gain that they could realise from this exchange rate volatility will definitely be reflected by positive movements in their stock values. A number of researchers have attempted to explain the impact of exchange rate fluctuation on stock market in Indian context as well as global context. H0 : There is no causality exist between stock returns and exchange rate H1 : There is causality exist between stock returns and exchange rate
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