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Macroeconomic Analysis of Capital Good Industry Performance: Evidence from Indian Stock Market


Affiliations
1 University Business School, Panjab University, Chandigarh - 160014, India
 

Purpose: With the heightened volatility of the stock market, there is a need to analyse variables that have a significant impact on the performance of the industry stocks. One of the most important factors that have been identified is the macroeconomic conditions of the invested country. Many researches assume that changes in the monetary indicator such as exchange rate, inflation rate and the money supply may bring change in the equity prices. Moreover, the effect these variables have specific industry may vary. Thus, the objective of the paper is to analyse the relationship between selected macroeconomic variables and specific industry performance in the stock market. Prior Literature: The previous literature provides a diverse opinion on the relationship between macroeconomic variables and equity returns. Dasgupta, (2012) and Naik and Padhi (2012) investigated the association of macroeconomic variables such as gross domestic product, rate of exchange, money supply, manufacturing production and national income, with stock market performance of equity shares conclude a positive and significant relationship between the selected variables. Whereas, Mishra (2004) did not find any long haul association but concluded that there exists a unidirectional relation between equity returns and some variables such as rate of exchange. Research Methodology: The monthly data has been collected for a period of eighteen years from March, 1999 to December, 2017. In this research, the relationship between five economic variables: Inflation Rate, Exchange Rate, Index of Industrial Production, International Crude Oil and Money Supply and selected BSE indices: S&P BSE Capital Goods has been analysed. The time series data has been subject to unit ischolar_main test to check the stationarity of the data. To better understand the relation, the log value of the macroeconomic variables has been used. The long term impact has been studied using the Toda & Yamamoto (1995), test and the Johnsen Cointegration Test for checking the robustness of the equation. Findings: The estimates of Block Exogeneity Wald test shows chi-square distribution with 4 degrees of freedom (Lag Length = 4) and the corresponding Probability. The results suggest that only exchange rate has a unidirectional causal relation with closing value of the capital good index. While Pairwise Granger casualty shows a significant unidirectional association with closing index value. The long term relation between the index prices and macroeconomic variables was further subject to Johansen Cointegration Trace Test which suggests that there are four cointegrating equations. Suggestions: Stability in the rate of exchange between US Doller and Indian Rupee is very significant for the growth of the Capital Good Industry. The Capital Good Industry includes a wide variety of manufacturing goods which are important auxiliaries to trade and increase the contribution of these specific industries to the gross domestic product of the country. Original Contribution: There have been several studies on the relationship between S&P BSE Sensex and macroeconomic variables, yet very few studies have tried to understand the relation between specific industries and macroeconomic variables, which will provide a comprehensive view of the performance of the stock market, where few listed companies with extremely high performing stocks mask the actual economic situation of the economy.

Keywords

Granger causality, Johansen Cointegration, Macroeconomic variables, Toda and Yamamoto Causality
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  • Macroeconomic Analysis of Capital Good Industry Performance: Evidence from Indian Stock Market

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Authors

Nikita Chopra
University Business School, Panjab University, Chandigarh - 160014, India

Abstract


Purpose: With the heightened volatility of the stock market, there is a need to analyse variables that have a significant impact on the performance of the industry stocks. One of the most important factors that have been identified is the macroeconomic conditions of the invested country. Many researches assume that changes in the monetary indicator such as exchange rate, inflation rate and the money supply may bring change in the equity prices. Moreover, the effect these variables have specific industry may vary. Thus, the objective of the paper is to analyse the relationship between selected macroeconomic variables and specific industry performance in the stock market. Prior Literature: The previous literature provides a diverse opinion on the relationship between macroeconomic variables and equity returns. Dasgupta, (2012) and Naik and Padhi (2012) investigated the association of macroeconomic variables such as gross domestic product, rate of exchange, money supply, manufacturing production and national income, with stock market performance of equity shares conclude a positive and significant relationship between the selected variables. Whereas, Mishra (2004) did not find any long haul association but concluded that there exists a unidirectional relation between equity returns and some variables such as rate of exchange. Research Methodology: The monthly data has been collected for a period of eighteen years from March, 1999 to December, 2017. In this research, the relationship between five economic variables: Inflation Rate, Exchange Rate, Index of Industrial Production, International Crude Oil and Money Supply and selected BSE indices: S&P BSE Capital Goods has been analysed. The time series data has been subject to unit ischolar_main test to check the stationarity of the data. To better understand the relation, the log value of the macroeconomic variables has been used. The long term impact has been studied using the Toda & Yamamoto (1995), test and the Johnsen Cointegration Test for checking the robustness of the equation. Findings: The estimates of Block Exogeneity Wald test shows chi-square distribution with 4 degrees of freedom (Lag Length = 4) and the corresponding Probability. The results suggest that only exchange rate has a unidirectional causal relation with closing value of the capital good index. While Pairwise Granger casualty shows a significant unidirectional association with closing index value. The long term relation between the index prices and macroeconomic variables was further subject to Johansen Cointegration Trace Test which suggests that there are four cointegrating equations. Suggestions: Stability in the rate of exchange between US Doller and Indian Rupee is very significant for the growth of the Capital Good Industry. The Capital Good Industry includes a wide variety of manufacturing goods which are important auxiliaries to trade and increase the contribution of these specific industries to the gross domestic product of the country. Original Contribution: There have been several studies on the relationship between S&P BSE Sensex and macroeconomic variables, yet very few studies have tried to understand the relation between specific industries and macroeconomic variables, which will provide a comprehensive view of the performance of the stock market, where few listed companies with extremely high performing stocks mask the actual economic situation of the economy.

Keywords


Granger causality, Johansen Cointegration, Macroeconomic variables, Toda and Yamamoto Causality

References