The Interrelationship between the Stock Markets and the Foreign Exchange Market

24 Pages Posted: 27 Oct 2012

See all articles by Prakash Apte

Prakash Apte

Indian Institute of Management, Bangalore

Date Written: March 30, 2001

Abstract

This paper investigates the relationship between the volatility of the stock market and that of the nominal exchange rate in India. Using the E-Garch specification proposed by Nelson (1991) it addresses the question whether changes in the volatility of the stock market affects volatility in the foreign exchange market and vice versa. The model specification incorporates asymmetric effects of positive and negative returns surprises on volatility both in the same market as well as spillovers across the two markets. Empirical analysis with one of the major stock market indices supports the hypothesis of such volatility linkages while for the other index there appears to be a spillover from the foreign exchange market to the stock market but not the other way round.

Suggested Citation

Apte, Prakash, The Interrelationship between the Stock Markets and the Foreign Exchange Market (March 30, 2001). IIM Bangalore Research Paper No. 169, Available at SSRN: https://ssrn.com/abstract=2161245 or http://dx.doi.org/10.2139/ssrn.2161245

Prakash Apte (Contact Author)

Indian Institute of Management, Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka
India

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