The dynamic linkage between exchange rate, stock price and interest rate in India

The dynamic linkage between exchange rate, stock price and interest rate in India PurposeThe purpose of this study is to examine linkage between exchange rate, stock return and interest rate for India.Design/methodology/approachUsing monthly data from January 2000 to December 2014, this study has scrutinized the linkage between exchange rate, stock return and interest rate using maximum overlap discrete wavelet transform (MODWT) which is very much appropriate when the variables are discrete in nature.FindingsOur major findings indicate that the empirical relationship between these variables is not significant at lower scales. As we go on higher scales, there is a clear linkage between them, and three markets are associated with each other. Moreover, the direction and type of the relationship depends on the frequency bands, and finally with the help of Granger causality tests, we established a lead/lag relationship between stock price, exchange rate and interest rate.Research limitations/implicationsThe linkage between stock market, foreign exchange market and money market in case of emerging countries like India is more relevant because negative or positive shocks affecting one market may be transmitted quickly to another through contagious effect.Originality/valueLittle attention has been given to examine the link between stock return, exchange rate and interest rate in India. This study adopts a more sophisticated MODWT approach for examining the cross-correlation and causality. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Economics and Finance Emerald Publishing

The dynamic linkage between exchange rate, stock price and interest rate in India

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1086-7376
DOI
10.1108/SEF-02-2016-0043
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this study is to examine linkage between exchange rate, stock return and interest rate for India.Design/methodology/approachUsing monthly data from January 2000 to December 2014, this study has scrutinized the linkage between exchange rate, stock return and interest rate using maximum overlap discrete wavelet transform (MODWT) which is very much appropriate when the variables are discrete in nature.FindingsOur major findings indicate that the empirical relationship between these variables is not significant at lower scales. As we go on higher scales, there is a clear linkage between them, and three markets are associated with each other. Moreover, the direction and type of the relationship depends on the frequency bands, and finally with the help of Granger causality tests, we established a lead/lag relationship between stock price, exchange rate and interest rate.Research limitations/implicationsThe linkage between stock market, foreign exchange market and money market in case of emerging countries like India is more relevant because negative or positive shocks affecting one market may be transmitted quickly to another through contagious effect.Originality/valueLittle attention has been given to examine the link between stock return, exchange rate and interest rate in India. This study adopts a more sophisticated MODWT approach for examining the cross-correlation and causality.

Journal

Studies in Economics and FinanceEmerald Publishing

Published: Aug 7, 2017

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