A Study of Exchange Rates Movement and Stock Market Volatility

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org/ijbm
International Journal of Business and Management
Vol. 5, No. 12; December 2010
A Study of Exchange Rates Movement and Stock Market Volatility

Dr. Gaurav Agrawal
Assistant Professor
ABV-Indian Institute of Information Technology and Management, Gwalior, India
Tel: 91-751-244-9805
E-mail: [email protected]
Aniruddh Kumar Srivastav (Corresponding author)

ABV-Indian Institute of Information Technology and Management Gwalior, India
Tel: 91-920-227-6324
Ankita Srivastava
ABV-Indian Institute of Information Technology and Management Gwalior, India
Tel: 91-989-355-1550
Abstract
This paper analyzes the relationship between Nifty returns and Indian rupee-US Dollar Exchange Rates. Several
statistical tests have been applied in order to study the behavior and dynamics of both the series. The paper also
investigates the impact of both the time series on each other. The period for the study has been taken from
October, 2007 to March, 2009 using daily closing indices. In this study, it was found that Nifty returns as well as
Exchange Rates were non-normally distributed. Through unit root test, it was also established that both the time
series, Exchange rate and Nifty returns, were stationary at the level form itself. Correlation between Nifty returns
and Exchange Rates was found to be negative. Further investigation into the causal relationship between the two
variables using Granger Causality test highlighted unidirectional relationship between Nifty returns and
Exchange Rates, running from the former towards the latter.
Keywords: Stock return, Exchange Rate, Unit root test, Correlation Test, Granger causality
1. Introduction
Many factors, such as enterprise performance, dividends, stock prices of other countries, gross domestic product,
exchange rates, interest rates, current account, money supply, employment, their information etc. have an impact
on daily stock prices (Kurihara, 2006: p.376).The issue of inter temporal relation between stock returns and
exchange rates has recently preoccupied the minds of economists, for theoretical and empirical reasons, since
they both play important roles in influencing the development of a countrys economy. In addition, the
relationship between stock returns and foreign exchange rates has frequently been utilized in predicting the
future trends for each other by investors. Moreover, the continuing increases in the world trade and capital
movements have made the exchange rates as one of the main determinants of business profitability and equity
prices (Kim, 2003). Exchange rate changes directly influence the international competitiveness of firms, given
their impact on input and output price (Joseph, 2002). Basically, foreign exchange rate volatility influences the
value of the firm since the future cash flows of the firm change with the fluctuations in the foreign exchange
rates. When the Exchange rate appreciates, since exporters will lose their competitiveness in international market,
the sales and profits of exporters will shrink and the stock prices will decline. On the other hand, importers will
increase their competitiveness in domestic markets. Therefore, their profit and stock prices will increase. The
depreciation of exchange rate will make adverse effects on exporters and importers. Exporters will have
advantage against other countries exporters and increase their sales and their stock prices will be higher (Yau
and Nieh, 2006). That is, currency appreciation has both a negative and a positive effect on the domestic stock
market for an export-dominant and an import-dominated country, respectively (Ma and Kao, 1990). Exchange
rates can affect stock prices not only for multinational and export-oriented firms but also for domestic firms. For
a multinational company, changes in exchange rates will result in an immediate change in value of its foreign
operations as well as a continuing change in the profitability of its foreign operations reflected in successive
income statements. Therefore, the changes in economic value of firms foreign operations may influence stock
prices. Domestic firms can also be influenced by changes in exchange rates since they may import a part of their
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inputs and export their outputs. For example, a devaluation of its currency makes imported inputs more
expensive and exported outputs cheaper for a firm. Thus, devaluation will make positive effect for export firms
(Aggarwal, 1981) and increase the income of these firms, consequently, boosting the average level of stock
prices (Wu, 2000). Thus, understanding this relationship will help domestic as well as international investors for
hedging and diversifying their portfolio. Also, fundamentalist investors have taken into account these
relationships to predict the future trends for each other (Phylaktis and Ravazzolo, 2005; Mishra et al., 2007; Nieh
and Lee, 2001; Stavrek, 2005).
Globalization and financial sector reforms in India have ushered in a sea change in the financial architecture of
the economy. In the contemporary scenario, the activities in the financial markets and their relationships with the
real sector have assumed significant importance. Since the inception of the financial sector reforms in the
beginning of 1990s, the implementation of various reform measures have brought in a dramatic change in the
functioning of the financial sector of the economy. Floating exchange rate that has been implemented in India
since 1991, facilitates greater volume of trade and high volatility in equity as well as Forex market, increasing its
exposure to economic and financial risks. The relationship between the two financial variables-stock returns and
exchange rates- became especially significant in the wake of the 1997 economic crisis in Asian countries, which
caused stock prices and exchange rate to fall across Asian markets. It has been suggested that difference in
expected stock returns should be related to changes in exchange rates. Moreover, in the recent years, because of
increasing international diversification, cross-market return correlations, gradual abolishment of capital inflow
barriers and foreign exchange restrictions or the adoption of more flexible exchange rate arrangements in
emerging and transition countries, these two markets have become significantly interdependent. These changes
have increased the variety of investment opportunities as well as the volatility of exchange rates and risk of
investment decisions and portfolio diversification process. Altogether, the whole gamut of institutional reforms
concomitant to globalization programme, introduction of new instruments, change in procedures, widening of
network of participants call for a re-examination of the relationship between the stock market and the foreign
sector of India. Correspondingly, researches are also being conducted to understand the current working of the
economic and the financial system in the new scenario. Interesting results are emerging particularly for the
developing countries where the markets are experiencing new relationships which are not perceived earlier.
Although, economic theory suggests that foreign exchange changes can have an important impact on the stock
price by affecting cash flow, investment and profitability of firms, there is no consensus about these relationship
and the empirical studies of the relationship are inconclusive (Joseph, 2002; Vygodina, 2006).
The present study is an endeavor to analyze the relationship between stock prices volatility and exchange rates
movement in India. The analysis on stock markets has come to the fore since this is the most sensitive segment
of the economy and it is through this segment that the countrys exposure to the outer world is most readily felt.
This paper attempts to examine how changes in exchange rates and stock prices are related to each other over the
period October 2007-March 2009. This period is marked by a bearish run on the stock market. The organization
of the paper is done as follows: Section 2 contains a brief literature review. Methodology and empirical results
are presented in Section 3 and 4 respectively. Concluding remarks take place in Section 5.
2. Literature Review
The existence of a relationship between stock prices and exchange rate has received considerable attention. Early
studies (Aggarwal, 1981; Soenen and Hennigar, 1988) in this area considered only the correlation between the
two variables-exchange rates and stock returns. Theory explained that a change in the exchange rates would
affect a firms foreign operation and overall profits which would, in turn, affect its stock prices, depending on the
multinational characteristics of the firm. Conversely, a general downward movement of the stock market will
motivate investors to seek for better returns elsewhere. This decreases the demand for money, pushing interest
rates down, causing further outflow of funds and hence depreciating the currency. While the theoretical
explanation was clear, empirical evidence was mixed. It was Maysami-Koh(2000), who examined the impacts of
the interest rate and exchange rate on the stock returns and showed that the exchange rate and interest rate are the
determinants in the stock prices. It was in 1992 that Oskooe and Sohrabian used Cointegration test for the first
time and concluded bidirectional causality but no long term relationship between the two variables. Najang and
Seifert(1992), employing GARCH framework for daily data from the U.S, Canada, the UK, Germany and Japan,
showed that absolute differences in stock returns have positive effects on exchange rate volatility. Ajayi and
Mougou in 1996 picked daily data from 1985 to 1991 for eight advance economic countries; employed error
correction model and causality test and eventually discovered that increase in aggregate domestic stock price has
a negative short-run effect and a positive long-run effect on domestic currency value. On the other hand,
currency depreciation has both negative short-run and long-run effect on the stock market. Abdalla and
Published by Canadian Center of Science and Education
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Murinde(1997) used data from 1985 to 1994, giving results for India, Korea and Pakistan that suggested
exchange rates Granger cause stock prices. But, for the Philippines the stock prices lead the exchange rates.
Furthering into Indian context, work in this area for the Indian Economy has not progressed much. Abhay Pethe
and Ajit Karnik (2000) has investigated the inter relationships between stock prices and important
macroeconomic variables, viz., exchange rate of rupee vis - a -vis the dollar, prime lending rate, narrow money
supply, and index of industrial production. The analysis and discussion are situated in the context of
macroeconomic changes, especially in the financial sector, that have been taking place in India since the early
1990s. There are some other related studies though not specifically focused to this aspect. Studies like Agarwal,
1997; Chakrabarti, 2001; and Trivedi & Nair, 2003, though, have shown that equity return has positive impact on
FII. In 1998, Ajayi et al. investigated the causal relations for seven advanced markets from 1985 to 1991 and
eight Asian emerging markets from 1987 to 1991 and supported unidirectional causality in all the advanced
economies but no consistent causal relations in the emerging economies. They explained the different results by
the differences in the structure and characteristics of financial markets between these groups. Morley and
Pentecost (2000) conducted a study on G-7 countries, finally stating that the reason for the lack of 7 strong
relationships between exchange rates and stock prices may be due to the exchange controls that were in effect in
the 1980s. Similarly, Nieh and Lee in 2001 examined the relationship between stock prices and exchange rates
for G-7 countries for the period from October 1, 1993 to February 15, 1999.They claimed no long-run
equilibrium relationship for each G-7 countries. While one days short-run significant relationship has been
found in certain G-7 countries, there is no significant correlation in the United States. These results might be
explained by each countrys differences in economic stage, government policy, expectation pattern, etc. In 2003,
Kim showed that S&Ps common stock price is negatively related to the exchange rate. Contemporarily, Smyth
and Nandha studied the relationship for Pakistan, India, Bangladesh and Sri Lanka over the period 1995-2001
and proved no long run relationship between variables. Unidirectional causality was seen running from exchange
rates to stock prices for only India and Sri Lanka. Also, Ibrahim and Aziz analyzed dynamic linkages between
the variables for Malaysia, using monthly data over the period 1977-1998 and their results showed that exchange
rate is negatively associated with the stock prices. Results that came from Gordon & Gupta in 2003 and Babu
and Prabheesh in 2007 claimed bidirectional causality stating that foreign investors have the ability of playing
like market makers given their volume of investments.
Again in 2004, Griffin stated foreign flows are significant predictor of returns in Thailand, India, Korea, Taiwan
and in 2005, Doong et al. showed that these financial variables are not cointegrated. Bidirectional causality could
be detected in Indonesia, Korea, Malaysia and Thailand and significantly negative relation between the stock
returns and the contemporaneous change in the exchange rates for all countries except Thailand.Ozair(2006) and
Vygodina(2006) worked with US data. While Ozair proved no causal linkage and no Cointegration between
these two financial variables, the latter claimed causality from large-cap stocks to exchange rates. Kurihara(2006)
takes Japanese stock prices, U.S. stock prices, exchange rate, Japanese interest rate etc.(period March
2001-September 2005). The results showed that exchange rate and U.S. stock prices affected Japanese stock
prices. Consequently, the quantitative easing policy implemented in 2001 has influenced Japanese stock prices.
Pan et al. (2007) employed data of seven East Asian countries over the period 1988 to 1998, proving
bidirectional causal relation for Hong Kong before the 1997 Asian crises and unidirectional causal relation from
exchange rates and stock prices for Japan, Malaysia, and Thailand and from stock prices to exchange rate for
Korea and Singapore. During the Asian crises, only a causal relation from exchange rates to stock prices is seen
for all countries except Malaysia. Contemporarily, Erbaykal and Okuyan studied 13 developing economies,
using different time periods and indicated causality relations for eight economies-unidirectional from stock price
to exchange rates in the five of them and bidirectional for the remaining three. No causality was detected in
Turkey; the reason of difference may be the time period used. However, Sevuktekin and Nargelecekenler found
bidirectional causality between the two financial variables in Turkey, using monthly data from 1986 to
2006.Again, Takeshi(2008) showed unidirectional causality from stock returns to FII flows, irrelevant of the
sample period in India where as the reverse causality works only post 2003.
To summarize, even though the theoretical explanation may seem obvious at times, empirical results have
always been mixed and existing literature is inconclusive on the issue of causality. This paper attempts to
investigate into the causal relationship between the two variables. The period of the study has been taken from
October 2007-March 2009. Time period up to 2009 is taken to investigate the global crisis and its effect on the
dynamics in Indian stock market. Also the analysis is based on the broader-based National Stock Exchange
Index, Nifty, composed of 50 stocks. The NSE has outstripped the BSE in terms of turnover, efficiency and
transaction costs; providing more liquidity and depth to trading. With strong preference of FIIs for holding
shares of large firms and more liquid stocks, the NSE Nifty appears a more reasonable index to work on than the
BSE Sensex.
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3. Data & Methodology

The present study is directed towards studying the dynamics between stock returns volatility and exchange rates
movement. We focus our study towards Nifty returns and Indian Rupee-US Dollar Exchange Rates. The
frequency of data is kept at daily level and time span of study is taken from October 11, 2007 to March 9, 2009.
The results from daily data are more precise and are better able to capture the dynamics between exchange rates
and Nifty index. The data consists of i) daily closing prices of the Nifty index , used to compute stock returns
and ii) Indian Rupee/US Dollar ratios on a daily basis, used to compute exchange rates. The daily returns and
exchange rates have been matched by calendar date. Data has been taken from Yahoo! Finance
(www.yahoofinance.com) and Oanda, the currency site, (www.oanda.com/convert/fxhistory ). Line plots of the
two time series-namely, Nifty returns and Exchange Rates- are shown in Fig 3.1 and 3.2 respectively.
Daily stock returns have been calculated by taking the natural logarithm of the daily closing price relatives, i.e. r
= ln P(t)/P(t-1) ,where P(t) is the closing price of the tth day. Similarly, natural logarithm of the daily exchange
rate relatives have been computed as ln E(t)/E(t-1). The values so obtained have been employed for studying the
relationship between stock returns and exchange rates. Line plots of the two, so obtained, normalized series are
shown in Fig 4.1 and 4.2 respectively.
After reviewing the existing literature, following hypotheses are formulated in order to study the behavior of the
two variables and were then put on test for the collected data to address the objective of the study:
Hypothesis 1: Stock returns and exchange rates are not normally distributed.
Hypothesis 2: Unit Root exists (i.e. non stationarity) in both the series.
Hypothesis 3: Correlation exists between the two variables-Stock returns and Exchange rates.
Hypothesis 4: No Causality exists between stock returns and exchange rates.
Following methods/tools are used to test the above hypotheses and subsequently draw inferences about the
behavior and dynamics of the two variables. The tests- namely, the JB Test, Correlation test, Unit root test and
Granger Causality test- were conducted with the aid of Eviews software (version 4.0).
3.1 Normality Test
The Jarque-Bera (JB) test [Gujarati (2003)] is used to test whether stock returns and exchange rates individually
follow the normal probability distribution. The JB test of normality is an asymptotic, or large-sample, test. This
test computes the skewness and kurtosis measures and uses the following test statistic:
JB = n [S2 /6 + (K-3)2 /24]
Where n = sample size, S = skewness coefficient, and K = kurtosis coefficient. For a normally distributed
variable, S = 0 and K = 3. Therefore, the JB test of normality is a test of the joint hypothesis that S and K are 0
and 3 respectively.
3.2 Unit Root Test (Stationarity Test)
Empirical work based on time series data assumes that the underlying time series is stationary. Broadly speaking
a data series is said to be stationary if its mean and variance are constant (non-changing) over time and the value
of covariance between two time periods depends only on the distance or lag between the two time periods and
not on the actual time at which the covariance is computed [Gujrati (2003)].A unit root test has been applied to
check whether a series is stationary or not. Stationarity condition has been tested using Augmented Dickey Fuller
(ADF) [Dickey and Fuller (1979, 1981), Gujarati (2003), Enders (1995)].
3.3 Augmented DickeyFuller (ADF) Test
Augmented Dickey-Fuller (ADF) test has been carried out which is the modified version of Dickey-Fuller (DF)
test. ADF makes a parametric correction in the original DF test for higher-order correlation by assuming that the
series follows an AR (p) process. The ADF approach controls for higher-order correlation by adding lagged
difference terms of the dependent variable to the right-hand side of the regression. The Augmented
Dickey-Fuller test specification used here is as follows:
Yt = b0 + Yt-1 + 1 Yt-1 + 2 Yt-2 +.. + p Yt-p + et
Yt represents time series to be tested, b0 is the intercept term, is the coefficient of interest in the unit root test,
i is the parameter of the augmented lagged first difference of Yt to represent the pth-order autoregressive process,
and et is the white noise error term.
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3.4 Granger Causality Test

According to the concept of Grangers causality test (1969, 1988), a time series xt Granger-causes another time
series yt if series yt can be predicted with better accuracy by using past values of xt rather than by not doing so,
other information is being identical. If it can be shown, usually through a series of F-tests and considering AIC
on lagged values of xt (and with lagged values of yt also known), that those xt values provide statistically
significant information about future values of yt time series then xt is said to Granger-cause yt i.e. xt can be used
to forecast yt. The pre-condition for applying Granger Causality test is to ascertain the stationarity of the
variables in the pair. Engle and Granger (1987) show that if two non-stationary variables are co-integrated, a
vector auto-regression in the first differences is unspecified. If the variables are co-integrated, an error-correcting
model must be constructed. In the present case, the variables are not co-integrated; therefore, Bivariate Granger
causality test is applied at the first difference of the variables. The second requirement for the Granger Causality
test is to find out the appropriate lag length for each pair of variables. For this purpose, we used the vector auto
regression (VAR) lag order selection method available in Eviews. This technique uses six criteria namely log
likelihood value (log L), sequential modified likelihood ratio (LR) test statistic, final prediction error (F & E),
AKaike information criterion (AIC), Schwarz information criterion (SC) and HannanQuin information criterion
(HQ) for choosing the optimal lag length. Among these six criteria, all except the LR statistics are monotonically
minimizing functions of lag length and the choice of optimum lag length is at the minimum of the respective
function and is denoted as a * associated with it.
Since the time series of exchange rates is stationary or I(0) from the ADF test, the Granger Causality test is
performed as follows:
Nt= 1+11Nt-1+ 12Nt-2+...+ 1nNt-n+ 11F-1+ 12Ft-2+...+ 1nFt-n+
1,t
Ft= 2+21Ft-1+ 22Ft-2+...+ 2nFt-n+ 21Nt-1+ 22Nt-2+...+ 2nNt-n+
2,t
Where n is a suitably chosen positive integer; j and j, j = 0, 1 k are parameters and s are constant; and uts
are disturbance terms with zero means and finite variances.
(Nt is the first difference at time t of Nifty where the series is non-stationary.)
4. Empirical Analysis
As outlined in the methodology, the analysis of the data was conducted in four steps.
First, normality test was applied on both the series to determine the nature of their distributions. For this purpose,
Jarque-Bera statistics were computed, which are shown in Table 4.1 along with descriptive statistics for the two
series. Skewness value 0 and kurtosis value 3 indicate that the variables are normally distributed. The skewness
coefficient, in excess of unity is taken to be fairly extreme [Chou 1969]. High or low kurtosis value indicates
extreme leptokurtic or extreme platykurtic [Parkinson 1987]. From the obtained statistics, it is evident that both
the variables are non-normally distributed, as the skewness values for Nifty returns and exchange rates are
--0.295287 and 0.297429 respectively and the kurtosis values are 4.712687 and 9.096539 respectively.
Second, having affirmed the non-normal distribution of the two variables, the question of stationarity of the two
time series posed concerns. Simplest way to check for stationarity is to plot time series graph and observe the
trends in mean, variance and autocorrelation. A time series is said to be stationary if its mean and variance are
constant over time. The line plots for the two series (log normal value of relatives) are shown in Fig 4.1 and Fig
4.2 respectively. As seen in the plots, for both the series, the mean and variance appear to be constant as the plot
trends neither upward nor downward. At the same time, the vertical fluctuations also indicate that the variance,
too, is not changing. This hints that stationarity in both the series in their level forms.
Since in addition to visual inspection, formal econometric tests are also needed to unambiguously decide the
actual nature of time series, ADF test was performed to check the stationarity of the time series. The results are
shown in Table 4.2.
Comparing the obtained ADF statistics for the two variables with the critical values for rejection of hypothesis of
existence of unit root, it becomes evident that the obtained statistics for Nifty returns and exchange rates,
-9.522362 and -8.078591 respectively, fall behind the critical values even at 1% significance level (-3.9887)
(thus, giving probability values 0.00); thereby, leading to the rejection of the hypothesis of unit root for both the
series. Hence, it can be safely concluded on the basis of ADF test statistics that stock returns as well as exchange
rates are, both, found to be stationary at level form. It may be noted here that as a consequence of stationarity at
level form in both the series, Johansen Cointegration test cannot be applied to the variables to determine
long-term relationship between them.
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Third, Correlation test was conducted between stock returns and exchange rates. Correlation test can be seen as
first indication of the existence of interdependency among time series. Table 4.3 shows the correlation
coefficients between stock returns and exchange rates. From the derived statistics, we observe the coefficient of
correlation to be -0.088, which is indicative of negative correlation between the two series. Thus, we may state
that the two series are weakly correlated as the coefficient of correlation depicts some interdependency between
the two variables. However, correlations may be spurious. The correlation needs to be further verified for the
direction of influence by the Granger causality test.
Fourth, to capture the degree and the direction of long term correlation between Nifty returns and exchange rates
under study, Granger Causality Test was conducted. Results are presented in table 4.4.From the statistics given
in the table, we can deduce that the null hypothesis Exchange Rates do not Granger cause Stock returnscannot be rejected as the obtained f-statistic, 1.60186, fails to fall behind the critical value. However, we can
certainly reject the null hypothesis that Stock returns do not Granger cause Exchange series. In other words, the
results for the Granger Causality test show that stock returns, clearly, Granger cause the Exchange rates. The
causality remains unidirectional. Exchange rates cannot be said to direct the stock returns. Hence, the result is
unidirectional causality running from stock returns to exchange rates.
5. Conclusion
This research empirically examines the dynamics between the volatility of stock returns and movement of
Rupee-Dollar exchange rates, in terms of the extent of interdependency and causality. To begin with, absolute
values of data were converted to log normal forms and checked for normality. Application of Jarque-Bera test
yielded statistics that affirmed non-normal distribution of both the variables. This posed questions on the
stationarity of the two series. Hence subsequently, stationarity of the two series was checked with ADF test and
the results showed stationarity at level forms for both the series. Then, the coefficient of correlation between the
two variables was computed, which indicated slight negative correlation between them. This made way for
determining the direction of influence between the two variables. Hence, Granger Causality test was applied to
the two variables, which proved unidirectional causality running from stock returns to exchange rates, that is, an
increase in the returns of Nifty caused a decline in the exchange rates but the converse was not found to be true.
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Appendix
Table 4.1. Descriptive Statistics
Stock Returns
Exchange Rates
Observations
346
346
Mean
-0.002166
0.000825
Median
-0.000716
0.000216
Maximum
0.067574
0.037868
Minimum
-0.130132
-0.031866
Std. Deviation
0.026266
0.007346
Skewness
-0.295287
0.297429
Kurtosis
4.712687
9.096539
Jarque-Bera
47.31656
540.9370
Probability
0.000000
0.000000
Sum
-0.749533
0.285487
Sum Sq Dev.
0.238025
0.018619
Result
Not Normal
Not Normal
69
Table 4.2. Results of Augmented Dickey Fuller Test

Table 4.2.1. ADF On NIFTY Return series
ADF Test Statistic
-9.522362
1%
Critical Value* -3.9887
5%
Critical Value
10% Critical Value
-3.4246
-3.1351
*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation
Dependent Variable: D(RETURN)
Method: Least Squares
Date: 09/01/09
Time: 13:29
Sample(adjusted): 6 346
Included observations: 341 after adjusting endpoints
70
Variable
Coefficient Std. Error
t-Statistic
Prob.
RETURN(-1)
-1.151233
0.120898
-9.522362
0.0000
D(RETURN(-1))
0.203932
0.104896
1.944131
0.0527
D(RETURN(-2))
0.187598
0.090457
2.073897
0.0389
D(RETURN(-3))
0.158126
0.074293
2.128409
0.0340
D(RETURN(-4))
0.040233
0.054395
0.739637
0.4600
0.000113
0.002890
0.039037
0.9689
@TREND(1)
-1.45E-05
1.44E-05
-1.003108
0.3165
R-squared
0.479671
Mean dependent var
5.87E-05
Adjusted R-squared
0.470324
S.D. dependent var
0.035939
S.E. of regression
0.026156
Akaike info criterion
-4.429171
Sum squared resid
0.228499
Schwarz criterion
-4.350511
Log likelihood
762.1737
F-statistic
51.31694
Durbin-Watson stat
2.009118
Prob(F-statistic)
0.000000
ISSN 1833-3850
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Table 4.2.2. ADF on exchange rate series

ADF Test Statistic
-8.078591
1%
Critical Value* -3.9887
5%
Critical Value
10% Critical Value
-3.4246
-3.1351
*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation
Dependent Variable: D(EXCHANGE_SERIES)
Method: Least Squares
Date: 09/01/09
Time: 12:48
Sample(adjusted): 6 346
Included observations: 341 after adjusting endpoints
Variable
Coefficient Std. Error
EXCHANGE_SERIES( -0.907166
t-Statistic
Prob.
0.112293
-8.078591
0.0000
0.100217
0.630524
0.5288
0.087352
-0.059036
0.9530
0.071722
0.067382
0.9463
0.054801
-0.465963
0.6415
-1)
D(EXCHANGE_SERIE 0.063189
S(-1))
D(EXCHANGE_SERIE -0.005157
S(-2))
D(EXCHANGE_SERIE 0.004833
S(-3))
D(EXCHANGE_SERIE -0.025535
S(-4))
C
6.77E-05
0.000812
0.083339
0.9336
@TREND(1)
3.86E-06
4.06E-06
0.949718
0.3429
R-squared
0.430331
Mean dependent var
8.86E-06
Adjusted R-squared
0.420097
S.D. dependent var
0.009649
S.E. of regression
0.007348
Akaike info criterion
-6.968536
Sum squared resid
0.018032
Schwarz criterion
-6.889875
Log likelihood
1195.135
F-statistic
42.05083
Durbin-Watson stat
1.997013
Prob(F-statistic)
0.000000
Table 4.3. Correlation Coefficients Matrix

Nifty Returns
Exchange Rates
Nifty Returns
1.000000
-0.087787
Exchange Rates
-0.087787
1.000000
71
Table 4.4. Results of Granger Causality Test

Null Hypothesis
F-Statistic
Probability
Stock Returns does not Granger Cause Exchange Series
1.60186
0.15904
Exchange Series does not Granger Cause Stock Returns
16.2319
2.6E-14
Table 4.5. Inference from Granger Causality Test

Nifty Returns
Exchange Rates
Nifty Returns
----
Exchange Rates
----
Denotes Granger Causality, running from one side to another
Figure 3.1. Line Plot of Nifty Indices Data

Figure 3.2. Line Plot of Exchange Rates Data
72
ISSN 1833-3850
E-ISSN 1833-8119

Figure 4.1. Line Plot of Nifty Returns

Figure 4.2. Line Plot of Log Normal Exchange Rates
73

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International Journal of Business and Management

Vol. 5, No. 12; December 2010