Dynamic Relationship Between Stock Market Sector Indices and Macroeconomic Variables in India

Dynamic Relationship Between Stock Market Sector Indices and Macroeconomic Variables in India

Neeru Gupta (Maharaja Agrasen Institute of Technology, Delhi, India) and Ashish Kumar (IIM Kashipur, Kashipur, India)
Copyright: © 2019 |Pages: 11
DOI: 10.4018/IJAMTR.2019070103

Abstract

This study investigates the long-term and short-term relationships between selected macroeconomic variables and the selected Indian stock market sector indices over the period of 2010 to 2017. The Johansen Co-integration Test, the Vector error correction model (VECM), is applied to calculate the long-term and short-term relationship between sector indices and macroeconomic variables. It is found that stock prices are exposed to macroeconomic factors, but the level of sensitivity is different in different sectors. Out of five sectors taken in the study, it is found that only the realty sector has long run relationship with macroeconomic variables. Other sectors have no long run relationship with macroeconomic variables. Along with this, it is also found that the Auto index has a significant short-term positive relationship with gold prices and the FMCG sector index has a significant short-term positive relationship with industrial production. The consumer price index and exchange rate have significant short run relationship with realty sector index.
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Review Of Literature

Ahamed (2008) studies the causal relationships between stock prices and the key macroeconomic variables representing real and financial sector of the Indian economy for the period March 1995 to March 2007 using quarterly data. Study indicates that stock prices in India lead economic activity except movement in interest rate. Interest rate seems to lead the stock prices. Co-integration regressions indicate the presence of a long run relationship between stock prices and FDI, stock prices and Money Supply and stock prices and IIP. In NSE, movement in NSE Nifty does not have effect on exchange rate and IIP while movement in BSE Sensex seems to cause these variables. The study indicates that exchange rate does not influence the BSE Sensex and NSE Nifty while movement in BSE Sensex and NSE Nifty does cause change in exchange rate. It indicates towards large FII inflows in recent years.

Chen, Roll, and Ross (1986) tested that whether innovations in macroeconomic variables are risks that are rewarded in the stock market. It is found that these sources of risk are significantly priced. Stock returns are exposed to systematic economic news, that they are priced in accordance with their exposures.

Elly and Oriwo (2012) investigates the relationship between macroeconomic variables on all share index (NASI) in Kenya for the period 2008 to 2012 and goes further to determine whether changes in macroeconomic variables can be used to predict the future NASI. The findings in the study indicate that 91 days T bill rate has a negative relationship with the NASI.

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