An Empirical Investigation of the Volatility Spill-over and Asymmetries between Nifty Index and Rupee- Dollar Exchange Rate
Authors
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Associate Professor, Department of Business Economics, Dr. Bhim Rao Ambedkar College, University of Delhi, New Delhi - 110094, Delhi ,IN
Rakesh Shahani -
Pursuing Post Graduate Diploma in Management (PGDM) from Birla Institute of Management Technology (Bimtech), Greater Noida - 201306, Uttar Pradesh ,INPrateek Tomar
DOI:
https://doi.org/10.18311/jbt/2020/25712Keywords:
Volatility Spill-over, AR (1)-GARCH (p, q), T-GARCH, Asymmetric Returns, B-P-G Heteroscedasticity TestJEL classification
, G1, G15Abstract
The present study is an attempt to investigate the conditional volatility of returns of the two major segments of Indian financial markets viz. Re/$ Exchange Rate and Nifty Index Stock Index using GARCH (p,q) methodology. The period of the study has been taken to be April 2007-March 2017 and the data has been collected as monthly closing prices of the two variables, namely rupee dollar exchange rate and NSE Nifty. The analysis has been carried on first differenced (log transformed) prices. For studying the spill-over of volatility from a market to another, squared residuals (after standardization) from another market have been included as variance regressors. Further to find out whether or not there was any asymmetric returns of the markets under study, Threshold GARCH (T-GARCH) Model has been employed. The results of the study revealed the presence of conditional volatility of returns. The optimal model was identified as ARCH (1) when Re/$ Exchange Rate was the dependent variable while it was GARCH (1,1) when Nifty Index was taken as dependent variable. The bi-directional volatility spill-over (contemporaneous) was clearly evident by the two models and the same was captured by the variance regressors i.e. the standardized squared residuals. Further the results showed no sign of any asymmetry in volatility as reflected by the T-GARCH coefficients.
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Accepted 2020-11-02
Published 2020-11-03
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