An empirical study on the interdependence among stock market, commodities market and foreign exchange market

Abstract

Financial markets are full of imperfections, which make results inconsistent with the expectations. Genuine conditions apart, in the present world of finance, human greed, system failures or national afflictions can make things very unpredictable. This is where risk comes into play. Most of the investors have one simple approach to dealing with risk. That is to avoid it by all means. In financial investment matters, this may not be a good strategy. As risk and return are correlated, every risk you are avoiding possibly deprives you of a handsome opportunity to build your wealth. Balancing risk with return in line with individual circumstances is what financial market management is all about, is a question. So it becomes evident to establish a relationship between all the three markets namely stock, commodities and foreign exchange market. This is to find out additional ways of making investments. Thus, it becomes important to throw light upon the neglected areas of financial markets. The connection between a country's stock market, commodities market and its foreign exchange market has been a subject of theoretical and empirical investigation for many years. The nature and magnitude of the interdependence between stock prices, commodity prices and exchange rates have implications for a number of crucial issues in international finance. First there is the question of whether stock markets price, commodity prices have any implication on exchange rate and vice- versa. This study attempts to examine whether or not a causal relationship exists between commodities, exchange rates and stock market by using the Granger Causality and co-relation, relationships were determined for data between 2005 and 2014 in India.