International Journal of Financial Management

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Revisiting the Dynamic Relationship between Macroeconomic Fundamentals and Stock Prices:An Evidence from Indian Stock Market


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1 Haryana School of Business, Guru Jambheshwar University of Science & Technology, Hisar, Haryana, India
     

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The relationship between stock prices and macroeconomic variables varies across countries, time periods, datasets used, and the frequency of data used. Thus, an in-depth study to reinvestigate the relationship between selected macroeconomic variables i.e. inflation rate, exchange rate, index of industrial production, gold price, money supply and yields on treasury bills, and Indian stock market for the period of April 2005 to March 2014 has been carried out. In this study Johansen's cointegration test, vector error correction model (VECM), impulse response functions (IRFs), and variance decomposition (VDCs) test have been applied. The results of Johansen cointegration test indicates a significant negative relationship between exchange rate, inflation rate, and index of industrial production with stock prices whereas there exists a significantly positive relationship of money supply and yield on treasury bills with stock prices. Vector error correction model helps to determine both short and long run causal relationship between macroeconomic variables and stock price. The results found short run causality runs from exchange rate to Nifty, Nifty to money supply, and inflation rate whereas long run causality found from Nifty to short term interest rate and money supply.

Keywords

Macro-Economic Variables, Indian Stock Market, Johansen Cointegration Test, Vector Error Correction Model.
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  • Revisiting the Dynamic Relationship between Macroeconomic Fundamentals and Stock Prices:An Evidence from Indian Stock Market

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Authors

Deepa Mangala
Haryana School of Business, Guru Jambheshwar University of Science & Technology, Hisar, Haryana, India
Anita Rani
Haryana School of Business, Guru Jambheshwar University of Science & Technology, Hisar, Haryana, India

Abstract


The relationship between stock prices and macroeconomic variables varies across countries, time periods, datasets used, and the frequency of data used. Thus, an in-depth study to reinvestigate the relationship between selected macroeconomic variables i.e. inflation rate, exchange rate, index of industrial production, gold price, money supply and yields on treasury bills, and Indian stock market for the period of April 2005 to March 2014 has been carried out. In this study Johansen's cointegration test, vector error correction model (VECM), impulse response functions (IRFs), and variance decomposition (VDCs) test have been applied. The results of Johansen cointegration test indicates a significant negative relationship between exchange rate, inflation rate, and index of industrial production with stock prices whereas there exists a significantly positive relationship of money supply and yield on treasury bills with stock prices. Vector error correction model helps to determine both short and long run causal relationship between macroeconomic variables and stock price. The results found short run causality runs from exchange rate to Nifty, Nifty to money supply, and inflation rate whereas long run causality found from Nifty to short term interest rate and money supply.

Keywords


Macro-Economic Variables, Indian Stock Market, Johansen Cointegration Test, Vector Error Correction Model.

References