ABSTRACT
The chapter investigates the relationship between stock market return, aggregate investor sentiment and exchange rate in the Indian context. The proxy variables for stock market return and investor sentiment and exchange rate are chosen as Nifty50 return and volatility index (VIX) and the foreign exchange rate of Indian rupee with respect to US dollar throughout April 2009 to March 2019. To explore the nexus between these three underlying variables, at first an unrestricted VAR (vector auto regression) model was used to find the optimal number of lags for defining the equilibrium relationship. The Granger causality test and Johansen cointegration test were conducted to explore both the short-term and long-term relationships between these variables. It is observed that stock market return and investor sentiment affect the exchange rate significantly in the short run. Although in the long run we did not find any significant relationship between the variables. The present chapter reveals that there may be other explanatory variables that affect the underlying relationship between the variables undertaken for this study. Therefore, it is the challenge of future researchers to carry out further research to explore the relationship by introducing other explanatory variables in this regard.
