THE IMPACT OF EXCHANGE RATE MOVEMENTS ON STOCK MARKET VOLATILITY IN SOUTH ASIAN DIVERSE ECONOMIES

Abstract

The relationship between exchange rate movements and stock markets reveals the interdependence of financial markets. The main aim of this study is to examine the impact of exchange rates on stock market volatility in three major economies in Asia: India, Sri Lanka, and Bangladesh. The study uses daily data from 2014 to 2023 of three major currencies of the three countries Indian Rupee, Sri Lankan rupee and Bangladeshi Taka against US dollar and stock market returns of Bombay Stock Exchange Sensitive Index (BSE SENSEX), All Share Price Index (ASPI), Dhaka Stock Exchange Broad Index (DSEX). Generalised Autoregressive Conditional Heteroskedasticity (GARCH) modelling and causality analysis are employed for the analysis. The findings of GARCH (1,1) model reveal that there is a significant negative impact of USD/INR and USD/LKR volatility on BSE SENSEX and ASPI, respectively, while the effect on DSEX is statistically insignificant. This suggests that equity markets in India and Sri Lanka are more vulnerable to currency fluctuations, potentially due to higher capital market integration and foreign investor exposure. In contrast, Bangladesh's weaker response may be due to less involvement in international markets compared to other two countries. These findings support the importance of accurate exchange rate forecasting and risk management strategies in emerging financial markets.