DYNAMIC RELATIONSHIP BETWEEN EXCHANGE RATES AND STOCK PRICES: EMPIRICAL EVIDENCE FROM INDIA

This study empirically determines the causal relation between the stock price and exchange rate in India. We used daily data since the use of monthly data may not be adequate to capture the effects of short term capital movements. Having established the stationarity condition of each series using ADF, PP and KPSS unit root tests, the causal linkages were examined using the Granger non-causality test prescribed by Toda and Yamamoto (1995). The study found that, there exists unidirectional causality from exchange rate to stock price in the India over the period 2004 to 2011. Johansen and Juselius (JJ) cointegration result shows that there is long run relationship between stock prices and exchange rates. The study suggests that the relationship between equity returns and exchange rate movements may be used to hedge their portfolios against currency movements. Additionally, risk management must take into consideration that these markets are correlated.