Proceedings of 11th Asian Business Research Conference
26-27 December, 2014, BIAM Foundation, Dhaka, Bangladesh, ISBN: 978-1-922069-68-9
Dependence between Stock Market and Foreign Exchange
Market in South Asia: A Copula-Garch Approach
Mr. Javed Bin Kamal
The paper studies the dependence pattern between stock market and foreign
exchange market of three countries of South Asia; namely Bangladesh, India and Sri
Lanka 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 paper applied
ARMA-GARCH type model to obtain marginal distribution. The results from marginal
models indicate that volatility dies immediately after a crisis; meanwhile positive news
creates more volatility than negatives. The results from copula models indicate
existence of asymmetric dependence, with upper tail dependence for all pairs,
comparing negligible lower tail dependence for Srilankan pair. Both Bangladeshi and
Indian pairs provide some diversification possibility, against no diversification for
investing in Srilankan market. Copula based dependence between stock market and
exchange rate market provide important implication in international investment
decision making.
JEL Classification: C32, C51, C52, G15, F30.
Keywords: Copulas, Tail dependence, Dependence structure, GARCH, Stock return,
Foreign exchange rate return.
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Mr. Javed Bin Kamal, Department of Economics, East West University, Dhaka, Bangladesh.