Cointegration and Causal Relationship between Exchange Rates and Stock Returns : A Study on Indian Context

The present study investigate the relationship between sensex returns and Indian-USD Exchange rates and the impact of the time series on each other. Exchange rate fluctuation will effect international trades, thus influence the stock market. The study is based on the secondary sources obtained from BSE and RBI database for the period from 1st January 2005 to 30th June, 2015. In the course of analysis, appropriate econometrics tools are used. ADF and PP Unit root test shows stationarity at level. Johansen cointegration test result indicates that there exist a long term relationship among the select variables. Correlation between exchange rates and stock rates was found to be negative. Granger causality test highlighted unidirectional relationship running from stock returns to exchange rates