Interaction among Gold, Equity, Government Securities, Foreign Exchange and Money Markets in India: A Time Series Analysis

Abstract

The financial sector of a country plays a pivotal role in growth and structural transformation of its economy, i.e., in economic development. The real world situation is characterized by uncertainties, asymmetric information and so on. Under such circumstances, optimal allocation of resources and efficient decision making become difficult. The objective of our study is to find out whether there was any long-run equilibrium relationship among Gold, Equity, Government Securities, Foreign Exchange and Money Markets in India between the period January 1995 to December 2013 using monthly data. The variables representing the corresponding markets are Mumbai gold price, BSE SENSEX, transactions in Government securities, Indian Rupee / US Dollar exchange rate and call money rate (proxy for interest rate). By empirical Time Series Analysis, we have found out that there is a long-run equilibrium relationship among Gold, Equity, Government Securities, Foreign Exchange and Money Markets in India. This implies that there is an arbitrage opportunity (opportunity to buy an asset at a low price then immediately selling it on a different market for a higher price) for the investors, resulting in profits without any risk. Another objective of this study is to find out the degree of risk involved while investing on the three financial assets (Gold, Share and Government Securities). By looking at the Descriptive Statistics, we have found out that variance (risk) of gold > share > government securities. This implies that investing on gold is riskiest, followed by investing on shares and finally investing on government securities which is least risky.