Dynamic relationship between stock prices and exchange rates (evidence from India)

Abstract

This paper analyses the relationship between stock 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 January 2004 to July 2013 using daily closing indices. In this study, it was found that Stock returns as well as Exchange Rates were non-normally distributed. Through a unit root test, it was also established that both the time series, exchange rate and stock returns, were stationary at the level form itself. Also the correlation was found to be negative.