Dynamic linkages among oil price, gold price, exchange rate, and stock market in India

• Published in: Resources policy 2016-09, Vol.49, p.179-185
• Main Authors: Jain, Anshul, Biswal, P.C.
• Format: Article
• Language: English
• Subjects: DCC GARCH; Exchange rate; Gold price; India; Non Linear Causality; Oil price
• ISSN: 0301-4207; 1873-7641
• DOI: 10.1016/j.resourpol.2016.06.001

Governments impose taxes and levies to manage the effect of gold and crude oil imports on the exchange rate. These in return have relations with the economy of the country, best reflected in the stock market index. This study aims to explore the relation between global prices of gold, crude oil, the USD–INR exchange rate, and the stock market in India. The dynamic contemporaneous linkages have been analyzed using DCC-GARCH (standard, exponential and threshold) models and the lead lag linkages have been examined using symmetric and asymmetric Non Linear Causality tests. Empirical analyses indicate fall in gold prices and crude oil prices cause fall in the value of the Indian Rupee and the benchmark stock index i.e. Sensex. The findings of this study also support the emergence of gold as an investment asset class among the investors. More importantly, this study highlights the need for dynamic policy making in India to contain exchange rate fluctuations and stock market volatility using gold price and oil price as instruments. •India is a major importer of oil and gold. These imports and the stock market have interactions with the exchange rate. Management of exchange rate requires knowledge of these interactions.•Time varying correlation and Non Linear Causality amongst oil price, gold prices, Indian exchange rate and Sensex Index examined.•DCC GARCH (GARCH, EGARCH and TGARCH) used to examine time varying correlations and Krystou–Labys (Symmetric and Asymmetric) tests for Non Linear Causality conducted.•Correlations between crude and Indian variables was higher during crisis period of 2008–2013 than the rest of the decadal period under study.•Asymmetric Non Linear Causality observed from both import commodities to both Indian variables. Fall in crude prices is seen to cause both the Indian Rupee exchange rate depreciation and the Sensex index to fall.•Feedback between gold prices and Sensex observed. The model coefficients seem to indicate that a fall in gold prices causes a fall in Sensex, but a fall in Sensex causes gold prices to gain.