An Empirical Relationship between Exchange Rates, Interest Rates and Stock Returns

14 Pages Posted: 10 Oct 2013

See all articles by Sudharshan Reddy Paramati

Sudharshan Reddy Paramati

University of Dundee; affiliation not provided to SSRN

Rakesh Gupta

Griffith University - Griffith Business School; CQ University; Association of Personal Finance and Investments

Date Written: October 4, 2013

Abstract

In this paper study aims to investigate the relationship between call money rates, exchange rates and stock returns from the perspective of India. We use monthly data for the time span of April 1992 to March 2011. This provides sufficient data set for the empirical analysis. Result from Granger causality test evidences bidirectional relationship between call money rates and exchange rates. It is also identified that call money rates and exchange rates Granger cause stock returns and did not find reverse causality from stock returns to call money and exchange rates. To explore, lead-lag interaction among the variables studied we employed VAR models. Results suggest that there is substantial lead-lag relationship from call money rates to exchange rates and stock returns. Similar relationship also found from exchange rates to call money rates and stock returns. However, there is no evidence of lead-lag causation from stock returns to call money and exchange rates. Findings of this study are useful for the investors and policy makers. In investors’ standpoint, they can utilize this historical information of call money rates and exchange rates for predicting the movements of stock returns. Similarly, policy makers can stabilize the stock market fluctuations by adopting appropriate policies towards interest rates and exchange rates for time to time.

Keywords: Direction of causality and Lead-lag interaction

Suggested Citation

Paramati, Sudharshan Reddy and Paramati, Sudharshan Reddy and Gupta, Rakesh, An Empirical Relationship between Exchange Rates, Interest Rates and Stock Returns (October 4, 2013). Available at SSRN: https://ssrn.com/abstract=2336043 or http://dx.doi.org/10.2139/ssrn.2336043

Sudharshan Reddy Paramati (Contact Author)

affiliation not provided to SSRN

University of Dundee ( email )

Dundee, Scotland DD1 4HN
United Kingdom
0138284845 (Phone)
DD1 4HN (Fax)

Rakesh Gupta

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia
+61 7 37357593 (Phone)
+61 7 3735 3719 (Fax)

CQ University ( email )

B-33, G-26
Fabie
North Rockhampton, QLD 4701
Australia
+61 7 4930 9158 (Phone)

Association of Personal Finance and Investments

Bruce Highway
Rockhampton
Australia
61749309158 (Phone)

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