An empirical evidence of interdependence of index futures market and exchange rates markets

Abstract

The effect of financial derivatives trading on the underlying spot markets has caught the interest of both academics and practitioners. Studies have been done in the area of linkage between stock market and foreign exchange market and also between respective spot market and futures market. Barely any study has been conducted with regards to combining the two frameworks. This study tries to fill the gap by studying the linkage between equity futures market and foreign exchange market in Indian Context. Study uses daily closing prices of CNX Nifty and Rupee/Dollar exchange rate for a period from January 1, 2005 till December 31, 2013. Granger Causality test, Unit root test and OLS model have been employed to analyze this relationship. And the results have shown that there is a bi-directional relationship between Foreign Exchange market and Stock cash market and Foreign Exchange market and Stock index futures market. There also exists a negative relationship between Stock cash market and Foreign Exchange market.