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Return and Volatility Spillover Effects between Rupee–Dollar Exchange Rate and Asian Stock Indices

Author

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  • S. Mahalakshmi
  • S. Thiyagarajan
  • Gopala Vasudevan
  • G. Naresh

Abstract

India is a major Asian economy that has attracted global investment due to its economic stability and relatively open financial markets. We investigate the return and volatility spillover effects between the Indian rupee against US dollar and stock index volatility in neighboring (Asian) nations. Consistent with the uncovered equity parity, we find that when the rupee depreciates against US dollar, the foreign institutional investors pull back their portfolio investments from other Asian markets and invest in Indian stock market, similarly if rupee appreciates they may divest their investments to gain profits. The unidirectional causality from the exchange rate to all stock indices is indicated by the causality in the mean approach. Our study shows a strong linkage between the currency value of a stable economy and the economies with which it has strong trade ties. Further, the results also show that investors adjust their position in the related markets during periods of currency appreciation and depreciation in an economy with significant growth prospects. JEL Codes: F31, D53, B23

Suggested Citation

  • S. Mahalakshmi & S. Thiyagarajan & Gopala Vasudevan & G. Naresh, 2022. "Return and Volatility Spillover Effects between Rupee–Dollar Exchange Rate and Asian Stock Indices," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 21(4), pages 428-450, December.
    • Handle: RePEc:sae:emffin:v:21:y:2022:i:4:p:428-450
    DOI: 10.1177/09726527221100467
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies

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