Causal relationship between stock price and exchange rate: evidence for India
by Manish Kumar
International Journal of Economic Policy in Emerging Economies (IJEPEE), Vol. 3, No. 1, 2010

Abstract: The purpose of this study is to investigate the long and short-run relation between stock index and exchange rates for India. The study uses cointegration methodology to test for the long-run relationship. Empirical results suggest that there is no long-run relationship between them. Furthermore, the study examines the causal relationship between two series using linear and non-linear Granger causality tests. The non-linear causality is investigated using noisy Mackey-Glass model. The results of both the causality tests reveal evidence of bi-directional relationship between stock index and exchange rates. The findings imply that regulators can consider developments in these two markets into account to promote stability and economic growth.

Online publication date: Thu, 22-Apr-2010

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