Project Report

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1.) RESEARCH METHODOLOGY
Problem Statement
In the last two decades, globalization, interlinkages of the capital markets, gradual eradication of capital inflow barriers and the implementation of more flexible exchange rate mechanism in developed as well as transition economies, created a systematic interdependency between and within the stock and foreign exchange markets. The individual have very vague idea about such relationship between two markets. Thus, investigating the relationship between stock prices and exchange rates has received unprecedented attention in the literature. A number of studies have empirically examined the relationship between the stock and foreign exchange markets. This study explores the evidence of relationship between exchange rates and stock prices and also lead lag relationship between exchange rates and stock prices. We use a three-step framework for examining dynamic relationships between exchange rates and stock index.
Literature Review
Apte (2001) investigated the relationship between the volatility of the stock market and the nominal exchange rate of India by using the EGARCH specifications on the daily closing USD/INR exchange rate, BSE 30 (Sensex) and NIFTY-50 over the period 1991 to 2000. The study suggests that there appears to be a spillover from the foreign exchange market to the stock market but not the reverse.
Bhattacharya and Mukharjee (2002) studied the nature of causal relation between the stock market, exchange rate, foreign exchange reserves and value of trade balance in India from 1990 to 2001 by applying the co-integration and long-run Granger Non-causality tests. The study suggests that there is no causal linkage between stock prices and the three variables under consideration.

To examine the dynamic linkages between the foreign exchange and stock markets for India, Nath and Samanta... [continues]

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