Dynamic Linkages Between Cnxbank Nifty and Exchange Rates: Evidence From Indian Market
Dynamic Linkages Between Cnxbank Nifty and Exchange Rates: Evidence From Indian Market
Dynamic Linkages Between Cnxbank Nifty and Exchange Rates: Evidence From Indian Market
Dynamic Linkages Between Cnxbank Nifty and Exchange Rates: Evidence From Indian Market
N.S.Nataraja1, Ganesh.L2 and Sunil Kumar1
1 2
(General Management, Alliance University, Bangalore, India) (Institute of Management, Christ University, Bangalore, India)
ABSTRACT: The present study deals with the examination of the causal relationship between foreign
exchange rates and Bank stock prices in India from January 2010 to December 2013 using the information of daily closing observations of the NSE Bank Nifty and the nominal Indian Rupee per US dollar exchange rates. The exchange rate of Indian rupee and US Dollar has been taken for the study, because, US dollar is considered as a prominent currency for foreign trade. Statistical tests are applied to study the behavior and dynamics of both the series. The study also investigates the effect of both the time series mutually. The results of the study indicate both Bank Nifty returns and Exchange Rates are not normally distributed. Also it was found that, time series; Exchange rate and Bank Nifty returns are stationary at the level form itself. A negative correlation is observed between Bank Nifty returns and Exchange Rates.
KEYWORDS: Exchange Rate, Bank Nifty, J-B Test, Granger causality, Unit root test. I. INTRODUCTION
Stock market is distinguished as an extremely momentous factor of the financial sector of any economy.it plays an imperative role in the mobilization of capital in India. Stock markets are very sensitive and they get affected whenever there is any calamity in the world whether it relates to religion, politics, finance, etc. So decision in choosing the stocks for any person should be very specific. Choosing stocks should be very practical and precise and also needs to be very sure of goals in the stock market. Investors should have good idea about stock exchanges and its role in the stock market. One should also analyze the whole market before investing in any stocks because a small mistake in choosing the right stocks can leave a person bankrupt. In India there are two stock exchanges Bombay stock exchange known as BSE and National stock exchange known as NSE. BSE has 30 stocks in its group for trading whereas NSE has 50 stocks for trading. NSE stocks are also known as nifty. The record of the large companies of different sectors is maintained by Nifty which is the leading index in the Indian Stock Market. It is also known as S&P CNX Nifty, Standard & Poors CRISIL NSE Index or simply Nifty 50. Nifty stocks consist of 23 different economic sectors. 1.1 Importance of Nifty NSE provides trading facility across the nation for all securities of different sectors. Through the process of an appropriate technology, it ensures equal access to all investors in the world. NSE achieved its objectives in a very short duration. It deals with different market segments like equity market and capital market, futures and options or derivatives market, wholesale debt market, mutual funds, initial public offerings and so on. For short term investments, NSE provides the platform in the form of daytradingwhich is most popular nowadays among the investors. Financial market in Indiaplays prominent role on collecting money and encouraging investments, therefore, current paper is designed to find the effect of Exchange rate on Banks stock prices in India through NSE.The outcome of this study will provide investors helps to compose their individual proper investment decisions on Banks stocks. 1.2 Bank Nifty (CNX Bank Index) CNX Bank Index developed by India Index Service and Product limited provides a benchmark of the Indian banking sector, It is the part of Nifty comprised of 12 most liquid and large capitalized stocks from the banking sector. CNX Bank Nifty provides performance of Indian Banks to investors and market intermediaries for investment. These bank stocks will trade on the National Stock Exchange. Banks have bigger role in Indian economy and it is very important to know the changes in investment pattern of investors in Bank stocks. In this regard itisan important and relevant in studying the effect of exchange rate on Bank stocks.
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Where n is the number of observations (or degrees of freedom in general); S is the sample skewness, and K is the sample kurtosis: The JB statistic asymptotically features a chi-squared distribution with two degrees of freedom, if the data has been drawn from normal distribution. This statistic can be used to test whether the data are from a normal distribution. Samples from a normal distribution will have an expected skewness of 0 and an expected excess kurtosis of 0 (which is the same as a kurtosis of 3). To test the hypothesis for normality of data, the null hypothesis to be tested are the skewness being zero and the excess kurtosis being zero. 5.1.2 Unit Root Test (Stationarity Test) According to Gujrati (2003), stationarity of series means the mean and variance are constant (nonchanging)with the passage of time and distance, or covariance computed at the actual time is not influenced by lag between the two time periods.stationarity of series can be checked by a unit root test.The common assumptions for asymptotic analysis are not valid when the variables of the regression model will not be stationary. As a result of this, parameters of the regression model cannot be tested because; the usual t-ratios will not follow a t-distribution.Augmented Dickey Fuller (ADF) [Dickey and Fuller (1979, 1981) test has been used for stationarity in the current study.
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Second, the result ofnon-normality of the two series helped to check thestationarity of the two-time series. The Figures of the time series can be used for checking. Stationarityin the series in a simple manner byobservingthe trends in mean, variance and autocorrelation.Thestationarity in the time series can be observed whenthe mean and variance are constant over the passage of time. The line plots for the two series (log normal value of relatives) are shown in the following Fig. 1 and 2.
B-Nifty
.12
.08
.04
.00
-.04
-.08 100 200 300 400 500 600 700 800 900
Fig:1 B-Nifty
E-rate
.04
.02
.00
-.02
-.04
-.06 100 200 300 400 500 600 700 800 900
Fig: 2 Exchange Rates Since the series show neither upward nor downward trends in the plots, for this series, the mean and variance seem to be constant. Also, the variance is not changing much as it is clear from the vertical fluctuations in the Figure. This indicates both series are stationary at their level forms. The stationarityof the time series is also checked by a formal econometric test, ADF test. The results are shown in Table 2 and Table 3. Table: 2 ADF test for Banks Nifty returns
Variable B_NIFTY(-1) C 1 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient -0.892456 0.000402 -4.08E-07 0.446299 0.445178 0.016185 0.258818 2681.879 398.1785 0 Std. Error 0.031625 0.001029 1.80E-06 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat t-Statistic -28.21978 0.390778 -0.227201 Prob. 0 0.696 0.8203 -8.40E-06 0.021729 -5.406415 -5.391585 -5.400776 1.991334
Exogenous: Constant, Linear Trend Lag Length: 0 (Automatic - based on SIC, maxlag=21)
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Exogenous: Constant, Linear Trend Lag Length: 0 (Automatic - based on SIC, maxlag=21) The obtained ADF statistics for the two variables, Banks Nifty returns and exchange rates are -28.21978and 31.31330 respectively. The null hypotheses of unit root for both the series are rejected at all levels of significance since the computed values fall behind the critical values.(i.e. giving probability values 0.00). Therefore, ADF test statistic values clearly say that Banks stock returns and exchangerates are stationary at level form. As a consequence of stationarityat level form in both the series, Johansen Co-integration test cannot be applied to the series to determinelong-term relationship between them. Table 4: Correlation between B-Nifty and E-rate B_NIFTY 1.000000 -0.397269 E_RATE -0.397269 1.000000
B_NIFTY E_RATE
Third, a correlation test is performed to study the relationship a between Banks stock returns and exchange rates. Study indicates the existence of interdependency among time series. The results of correlation test are shown in the Table 4. The coefficient of correlation between Banks stocks return and exchange rates found to be 0.397269, a negative correlation between the two series. However, this correlation may be spurious. Therefore, the direction of influence between variables is verified by the Granger causality test. Table 5: Pairwise Granger Causality Tests Null Hypothesis E_RATE does not Granger Cause B_NIFTY B_NIFTY does not Granger Cause E_RATE Obs 990 F-Statistic 3.61237 1.98258 Prob. 0.0273 0.1383
Fourth, the results of Granger-causality test between exchange rates and stock prices are shown in the Table5.The Null hypothesis Exchange Rates do not Granger cause Stock returns is rejected at 5% level of significance. However, the second null hypothesis Banks Stock returns do not Granger cause Exchange series, cannot be rejected. The results of the Granger Causality test states that Exchange rates, clearly, Granger cause the Banks stocks where as Banks stocks prices cannot be said to direct the Exchange rates. Hence, this is the clear indication of unidirectional causality and causality running from exchange rates to Banks stock returns. It is crucial that the outcome of causality between the particular indicators does not mean that movement in one indicator essentially causes movements in another indicator.
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REFERENCES
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