A Scrutiny on Volatility and Leverage Effect in Indian Stock Market with Reference to Gold, Oil, Dollar Rates

Abstract

The uncertainty in financial market compels the investors to reallocate their capital from stock market to other complementary alternatives like Gold, Oil and Dollar. This research aims to explore the leverage effect of Gold-Oil-Dollar rates on Indian stock market. The work extensively covers daily price observations of gold, crude oil, US Dollar and Nifty from 1st January 2012 to 31st December 2016. In terms of returns the stock market outperformed over Gold, Oil and Dollar throughout the study period. GARCH (1, 1) model confirmed the long-term persistency of Gold-Oil-Dollar rates over stock market volatility. Interestingly an inverse leverage effect was examined from EGARCH model and it signals that any increase in Gold-Oil-Dollar rates will enhance the stock market volatility. Further the diagnostic test results shows that the crude oil price fluctuations reported to have more significant influence on stock market volatility. The study can successfully serve the interest of investors, financial planners, policy makers and researchers by addressing some key macroeconomic issues related to financial markets.

Keywords: Gold-Oil-Dollar Effects, Unit Root Test, Stock Market Volatility, GARCH (1, 1), Leverage Effect, and EGARCH

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