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Volatility spillovers of rupee-dollar and rupee-euro exchange rates on Indian stock prices: evidence from GARCH model

I, Sahadudheen I (2013): Volatility spillovers of rupee-dollar and rupee-euro exchange rates on Indian stock prices: evidence from GARCH model.

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Abstract

This paper examines the effect of volatility in both rupee-dollar and rupee-euro exchange rates on stock prices in India using daily data from 3-Apr-2007 to 30-Mar-2012. Adopting a generalized autoregressive conditional heteroskedasticity (GARCH) and exponential GARCH (EGARCH) model, the study suggests a negative relationship between exchange rate and stock prices in India. Even though India is a major trade partner of European Union, the study couldn’t find any significant statistical effect of fluctuations in Euro-rupee exchange rates on stock prices, while the effect of fluctuations in Dollar-rupee exchange rates on stock prices is highly significant. The study also reveals that shocks to exchange rate have symmetric effect on stock prices and exchange rate fluctuations have permanent effects on stock price volatility in India.

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