An Empirical Investigation into the Relationship of Crude Oil Price, Exchange Rate and BSE Sensex

Abstract

The study investigates long run relationships between oil prices, exchange rates and stock prices in India for the period April 2005 to March 2013 using monthly data. The empirical exercise consists of (1) testing for a unit root in each series (2) testing for the number of co-integrating vectors in the system (3) estimating and testing for the co-integrating relationship in the framework of a vector error correction model (4) testing the direction of causality between the variables using Granger Causality test. The results from the Augmented Dickey - Fuller unit root procedures indicate that all the three variables are first difference stationary. Johansen and Juselius cointegration test suggests that there is at most one co-integrating vector existing among the three variables and the results from Granger causality Wald test suggests that causality runs from Sensex to Crude oil, but not vice versa.