International Journal of Banking, Risk and Insurance

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Spillover Effects in External and Domestic Markets : GARCH Estimation of Crude Oil Price, Exchange Rate, and Stock Price Volatilities


Affiliations
1 Department of Econometrics, University of Madras, Chennai, Tamil Nadu, India
     

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Macroeconomic stability is crucial not only for economic growth but also for the living standards and investments in a market economy. The macroeconomic variables like crude oil price, gold price, exchange rate, inflation and stock returns are highly correlated to each other and are highly volatile, and the volatility in one market spills over to other markets. This paper analyses the dynamic causality between crude oil price, exchange rate and BSE Sensex and their volatilities in India. The daily data on macro variables for 14 years between January 2006 to March 2019 is used in the GARCH estimation of causal effects of volatility spillovers. The GARCH estimates show that the volatility and volatility spillover of one market cause volatility and volatility spillovers in other markets in India. The crude oil price and exchange rate volatility and volatility spillovers cause volatility in BSE Sensex. The volatility in BSE Sensex is highly overdone by internal shocks of the stock market itself.

Keywords

Oil Price, Exchange Rate, Stock Market, Volatility, Causal Effect, GARCH Estimation.
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  • Spillover Effects in External and Domestic Markets : GARCH Estimation of Crude Oil Price, Exchange Rate, and Stock Price Volatilities

Abstract Views: 252  |  PDF Views: 0

Authors

T. Lakshmanasamy
Department of Econometrics, University of Madras, Chennai, Tamil Nadu, India

Abstract


Macroeconomic stability is crucial not only for economic growth but also for the living standards and investments in a market economy. The macroeconomic variables like crude oil price, gold price, exchange rate, inflation and stock returns are highly correlated to each other and are highly volatile, and the volatility in one market spills over to other markets. This paper analyses the dynamic causality between crude oil price, exchange rate and BSE Sensex and their volatilities in India. The daily data on macro variables for 14 years between January 2006 to March 2019 is used in the GARCH estimation of causal effects of volatility spillovers. The GARCH estimates show that the volatility and volatility spillover of one market cause volatility and volatility spillovers in other markets in India. The crude oil price and exchange rate volatility and volatility spillovers cause volatility in BSE Sensex. The volatility in BSE Sensex is highly overdone by internal shocks of the stock market itself.

Keywords


Oil Price, Exchange Rate, Stock Market, Volatility, Causal Effect, GARCH Estimation.

References