Investigating causal relationship between stock return with respect to exchange rate and FII: evidence from India

Kumar, Sundaram (2009): Investigating causal relationship between stock return with respect to exchange rate and FII: evidence from India.

Abstract

The purpose of this paper is to investigate the relationship between macroeconomic parameters like Exchange rate and foreign institutional investment with stock returns in India, in particular at National Stock Exchange. I find that both stock returns and exchange rate are integrated of order one. The Engle–Granger Cointegration test is then performed, suggesting that there is not a long-run equilibrium relationship between stock returns and exchange rates at 5% significance level. Moreover, there is no evidence suggesting that there is any causality relationship from the nominal exchange rate to the stock returns. Furthermore, FII data is found to be I(0) i.e. It doesn’t have a unit root at conventional level. It also gives positive unidirectional Granger causality results i.e. stock returns Granger cause FII. No reverse causality is seen even after inserting a structural break in 2003, as some of the researchers suggest.

• Item Type: MPRA Paper
• Language: English
• Keywords: Unit root test; Cointegration; Granger causality; Exchange rate; Stock return; FII
• Subjects: C - Mathematical and Quantitative Methods > C0 - General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes

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