The Dynamic Long Run and Short Run Linkages between Exchange Rates and BSE Sensex Return

Abstract

The present study explored the dynamic effects of Exchange rates on BSE Sensex return over a period of April 2002 to March 2017. The study analyzes the long run relationship between exchange rates and BSE Sensex return, and examine short run effect of exchange rates on BSE Sensex return. The study employed statistical techniques namely, ADF Test, Correlation, OLS Regression, Co-integration Test, Granger Causality Test, VAR model and GARCH. The exchange rates play a curial role in BSE Sensex returns and deprecation of exchange rate affects growth of stock market and economy of a country. The study results found that exchange rates were negative correlated on BSE Sensex return. In regression results revealed that exchange rates were 26 percent influenced on BSE Sensex returns, especially US exchange rate recorded high negative impact on BSE Sensex return compared to other exchange rates. The results exhibited that existence of co-movement relation between exchange rates and BSE Sensex return. There was no causal effect from exchange rates to BSE Sensex returns. In VAR results exhibited that there was short run effect and GARCH results revealed that exchange rates were significantly volatile on BSE Sensex return. The results concluded that exchange rates were significant impact on BSE Sensex return and there was existence of long run relationship between exchange rates and BSE Sensex return. The study results suggested to investor’s community should aware about the movements of exchange rates; particularly in US XR because it has highly interaction with Indian stock market and it may reduce the risk from the high fluctuation of exchange rates. Policy maker should improve the policy regime and need to increases the exports comparatively import, reduce the rate of inflation, increases the production index, and government policy would positive effect the stock market and the growth of economy of a country.