Foreign Exchange Literature Review

Literature Review

To examine the dynamic linkages between the foreign exchange and stock markets for India, Samanta and Nath (2003) employed the Granger causality test on daily data during the period March 1993 to December 2002. The empirical findings of the study suggest that these two markets did not have any causal relationship. When the study extended its analysis to verily if liberalization in both the markets brought them together, it found no significant causal relationship between the exchange rate and stock price movements, except for the years l993, 2001 and 2002 during when a unidirectional causal influence from stock index return to return in forex market is detected and a very mild causal influence in the reverse direction is

Five composite indices and five sectoral indices were studied over the period of one year: 2000. The results indicated that exchange rate has high correlation with the movement of stock markets.

Apte (2001) investigated the relationship between the volatility of the stock market and the nominal exchange rate of India by using the EGARCH specifications on the daily closing INR/USD exchange rate, BSE30 (Sensex) and NIFTY50 over the period l99l to 2000. The study suggests that there appears to be a spillover from the foreign exchange market to the stock market but not the reverse.

Seyed M Mehdian and Richard A Ajayi, Joseph Friedman (1998) employed monthly and quarterly data on a set of advanced and emerging economies from 1973- 1983 to examine the relationship between real stocks return differentials and changes in real exchange rates.

Mougoue and Ajayi (1996) investigate the short-and long- run relationship between stock prices and exchange rates in eight advanced economies. Of interest to me are the results on short run effects in the U.S. and U.K. markets. They find that an increase in stock prices causes the currency to depreciate for both the U.S. and the

 To understand the Stock Markets changes.

 To analyze the relationship between stock market and exchange market

Hypothesis to be tested

H0: There is no significant relation between stock prices and exchange rates

H1: There is significant relation between stock prices and exchange rates

METHODOLOGY

The data collected for the research purpose are secondary data. The data collected are daily historical stock price for five years of the BSE100 index and daily historical exchange rate of INR &USD. The period tested was from April 2010 to March 2015. Daily data are preferred in this study. The choice of daily closing price is realistic and helpful to calculate and testing the results in technical analysis.

Limitations

The study mainly depends on the secondary data; it may not represent the exact picture.

Time is another limiting factor in this report.

It does not help to take any major decisions.

There is difference in definitions.

Accuracy of testing the performance of selected currency exchange rates in comparison with stock market depends on the experience of the research.

Data Source

Historical share prices of the BSE100 index points for the period has been taken from the database of moneycontrol.com and exchange rates information has been taken from