Understanding Dynamic Relationship among Gold Price, Exchange Rate and Stock Markets: Evidence in Indian Context

The purpose of research in this article is to investigate the relationship among gold prices, Bombay Stock Exchange's Sensex, National Stock Exchange's Standard and Poor's (S&P) Financial Services LLC CNX NIFTY1 (S&P CNX NIFTY) and US dollar/Indian rupee (USD/INR) exchange rate for the period January 1998-April 2014. The relationship among these variables has been studied by applying vector error correction model (VECM) in order to check the long-run and short-run causality. Johansen cointegration test has been applied to find out the long-term cointegration among variables in the study. In further analysis, Wald's coefficient diagnosis and residual analysis revealed that gold prices, SENSEX, USD/INR and S&P CNX NIFTY are in equilibrium in the short run and long run. Granger causality test finally confirms the presence of unidirectional causality that runs from gold prices to S&P CNX NIFTY and also from gold prices to USD/INR exchange rate at current prices.