Causal Relationship between Macro-Economic Indicators and Stock Market in India

Abstract

This paper investigated the market efficiency and causal relationship between selected Macroeconomic variables and the Indian stock market during the period January 2005 to February 2011 by using Ljung-Box Q test, Breusch-Godfrey LM test, Unit Root test, Granger Causality test.The study confirms the presence of autocorrelation in the Indian stock market and macro economic variables which implies that the market fell into form of Efficient Market Hypothesis. Further the Granger-causality test shows evidence of bidirectional relationship between interest rate and stock market, exchange rate and stock market, international stock market and BSE volume, exchange rate and BSE volume. So it suggests that any change of exchange rate, interest rate and international market significantly influencing the stock market in the economy and vice versa. The study also reported unidirectional causality running from international stock market to domestic stock market, interest rate, exchange rate and inflation rate indicating sizeable influence in the stock market movement in the considered period. The study points out that the Indian stock market is sensitive towards changing behavior of international market, exchange rate and interest rate in the economy and they can be used to predict stock market price fluctuations.

Analysis of the impact of select macroeconomic variables on the Indian Stock Market: A heteroscedastic cointegration approach

“…If a firm is dealing in export, than exchange rate variability can have a bearing on the cash flows. Tripathy (2011) found that the variability of the exchange rate affects the trading volume. Index of industrial production (IIP) is another important indicator chosen for the study, which reflects the performance of the industrial sector.…”

An Impact of Macroeconomic Variables on the functioning of Indian Stock Market: A Study of Manufacturing Firms of BSE 500

“…The different conclusions have been provided by the various conducted studies according to the selection of variables, methodologies, techniques and tests used. Here, we discussed some previous research works and their conclusions that are related to our research work [13][14][15][16][17][18][19][20][21].…”

The Effects of Macroeconomic Variables and Corporate Financial Performance on Stock Prices of Palm Oil Companies in Indonesia

“…Figure 1 shows the movement of the share price of seven palm oil issuers in Indonesia from 2010 to 2016. Tripathy (2011) conducted a study that showed that there was a correlation between the Indian capital market and macroeconomic variables. Adebiyi et al (2009) in his research for a case study in Nigeria showed that oil prices negatively affected stock returns, which means that rising oil prices will reduce stock returns in Nigeria.…”