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

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  • Kumar, Sundaram

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.

Suggested Citation

  • Kumar, Sundaram, 2009. "Investigating causal relationship between stock return with respect to exchange rate and FII: evidence from India," MPRA Paper 15793, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15793
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    References listed on IDEAS

    as
    1. Takeshi Inoue & Shigeyuki Hamori, 2014. "Causal Relationships in Mean and Variance between Stock Returns and Foreign Institutional Investment in India," World Scientific Book Chapters, in: INDIAN ECONOMY Empirical Analysis on Monetary and Financial Issues in India, chapter 5, pages 53-72, World Scientific Publishing Co. Pte. Ltd..
    2. Ozturk, Ilhan & Kalyoncu, Huseyin, 2007. "Foreign Direct Investment and Growth: An Empirical Investigation based on Cross-Country Comparison," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 60(1), pages 75-81.
    3. Naeem Muhammad & Abdul Rasheed, 2002. "Stock Prices and Exchange Rates: Are they Related? Evidence from South Asian Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 535-550.
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    Cited by:

    1. Hemantkumar P. Bulsara & Vaishali Samir Dhingra & Shailesh Gandhi, 2015. "Dynamic Interactions between Foreign Institutional Investment Flows and Stock Market Returns – The Case of India," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(3), September.
    2. Rambeli@Ramli, Norimah & Hashim, Emilda & Hashim, Asmawi & Affizzah Awang Marikan, Dayang & Podivinsky, Jan, 2017. "Empirical Analysis on Exchange Rate Fluctuation and Sectoral Stock Returns in Malaysia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 51(1), pages 31-38.
    3. Sangram Keshari Jena & Aviral Kumar Tiwari & Shawkat Hammoudeh & Muhammad Shahbaz, 2020. "Dynamics of FII flows and stock market returns in a major developing country: How does economic uncertainty matter?," The World Economy, Wiley Blackwell, vol. 43(8), pages 2263-2284, August.
    4. Sinem Derindere KOSEOGLU & Emrah Ismail CEVIK, 2013. "Testing for Causality in Mean and Variance between the Stock Market and the Foreign Exchange Market: An Application to the Major Central and Eastern European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(1), pages 65-86, March.

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    More about this item

    Keywords

    Unit root test; Cointegration; Granger causality; Exchange rate; Stock return; FII;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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