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Regime Switching Dynamic Currency Exposure of Indian Stock Market

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Revisiting the Indian Financial Sector

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Abstract

The study explores the nature of time-varying currency exposure for Indian stock market. It considers a period of twenty-one years from January 1999 to July 2020 that covers some major crisis periods in Indian market including the recent pandemic. Using a Markov switching model, the study finds currency exposure to be significantly volatile and varying over regimes. Exposure shows significant persistence, particularly in the high-risk regime. Results of discrete threshold regression suggest that, historically, the impact of foreign exchange market on time-varying exposure has been stronger than that of the stock market. Risks escalate as the latter plunges into crisis. Mere fluctuations around trend are least likely to increase exposure. Any currency appreciation, however, has been associated with sharp increase in exposure. This raises the risks of having significant and persistent escalation in currency exposure even in a tranquil period. Such behaviour might add to non-idiosyncratic risks of investment making hedging difficult. The issue has bearing for the policy-makers too. The recent pandemic situation is witnessing significant increases in exposure. This calls for adopting suitable monetary policy and providing stimulus to boost up financial markets. As pointed out by IMF, emerging nations might find the situation difficult to cope with.

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Authors and Affiliations

  1. Department of Economics, Presidency University, 86/1 College Street, Kolkata, West Bengal, 700073, India

    Gagari Chakrabarti

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  1. Gagari Chakrabarti
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Correspondence to Gagari Chakrabarti .

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  1. Narsee Monjee Institute of Management Studies, Hyderabad, Telangana, India

    Paramita Mukherjee

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Chakrabarti, G. (2022). Regime Switching Dynamic Currency Exposure of Indian Stock Market. In: Mukherjee, P. (eds) Revisiting the Indian Financial Sector. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-16-7668-0_12

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  • DOI: https://doi.org/10.1007/978-981-16-7668-0_12

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