Dependence Between Stock Market and Foreign Exchange Market in South Asia: a Copula-Garch Approch.

Abstract

The thesis studies the dependence pattern between stock market and foreign exchange market of three South Asian countries; namely Bangladesh, India and Sri Lanka by using five copula functions, to reveal asymmetric dependence structure. Using daily return series for the period of July 31, 2009 to July 31, 2013, the thesis applied ARMA-GARCH type model to obtain marginal distributions of return series. The results from marginal models indicate that positive news creates more volatility than negatives; meanwhile such volatility dies immediately after a crisis. The results from copula models indicate existence of asymmetric dependence, with upper tail dependence for all pairs. Both Bangladeshi and Indian pairs provide some diversification possibility, against no diversification for investing in Srilankan market. Copula based dependence between stock market and foreign exchange market provides important implication in international investment decision making.