Integration between Forex and Capital Markets in India: An Empirical Exploration

11 Pages Posted: 7 Dec 2003

See all articles by Golaka C. Nath

Golaka C. Nath

Clearing Corporation of India

G. P. Samanta

Reserve Bank of India

Abstract

This paper examines the extent of integration between foreign exchange and stock markets in India during the liberalisation era. The database cover daily observations on stock price index and exchange rate of Indian Rupee for a period of ten financial years from April 1993 to March 2003. Empirical analysis is carried out by employing two different methodology, first, Granger's causality test in vector auto-regression (VAR) framework and second, the Geweke's feedback measures. Empirical results are no robust on choice of methodology. While, results in VAR framework indicate very poor causal link between returns in two markets in most of the financial years, the Geweke's feedback measures detect strong causal relationship in each financial year. Thus, there is a need to undertake a rigorous investigation to settle the status on integration between two markets considered here. Future research may also focus on identifying the possible reasons as to why the extent of market integration changes over time.

Keywords: Market Integration/Interlinkage, Granger's Causality and Causality Tests, Geweke Feedback Measures

JEL Classification: F30, F36, G15

Suggested Citation

Nath, Golaka C. and Samanta, G. P., Integration between Forex and Capital Markets in India: An Empirical Exploration. Available at SSRN: https://ssrn.com/abstract=475822 or http://dx.doi.org/10.2139/ssrn.475822

Golaka C. Nath (Contact Author)

Clearing Corporation of India ( email )

FP No. 822 Collegel Lane
Off S K Bole Road. Agar Bazar Dadar (W)
Mumbai, MAHARASTRA 400028
India

G. P. Samanta

Reserve Bank of India ( email )

359, Anna Salai
Teynampet
Chennai, Tamil Nadu 600018
India