Pramod Kumar, Naik and Puja, Padhi (2012): The impact of Macroeconomic Fundamentals on Stock Prices revisited: An Evidence from Indian Data.
Download (252Kb) | Preview
The study investigates the relationships between the Indian stock market index (BSE Sensex) and five macroeconomic variables, namely, industrial production index, wholesale price index, money supply, treasury bills rates and exchange rates over the period 1994:04–2011:06. Johansen’s co-integration and vector error correction model have been applied to explore the long-run equilibrium relationship between stock market index and macroeconomic variables. The analysis reveals that macroeconomic variables and the stock market index are co-integrated and, hence, a long-run equilibrium relationship exists between them. It is observed that the stock prices positively relate to the money supply and industrial production but negatively relate to inflation. The exchange rate and the short-term interest rate are found to be insignificant in determining stock prices. In the Granger causality sense, macroeconomic variable causes the stock prices in the long-run but not in the short-run. There is bidirectional causality exists between industrial production and stock prices whereas, unidirectional causality from money supply to stock price, stock price to inflation and interest rates to stock prices are found.
|Item Type:||MPRA Paper|
|Original Title:||The impact of Macroeconomic Fundamentals on Stock Prices revisited: An Evidence from Indian Data|
|Keywords:||Stock market index, macroeconomic variables, co-integration test, causality test|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
G - Financial Economics > G0 - General
|Depositing User:||Pramod K Naik|
|Date Deposited:||23. May 2012 20:52|
|Last Modified:||12. Feb 2013 08:15|
Abugri, B. A. (2008). Empirical Relationship between Macroeconomic Volatility and Stock Return: Evidence from Latin American Markets, International Review of Financial Analysis, 17: 396-410.
Ahmed, S. (2008). Aggregate Economic Variables and Stock Market in India, International Research Journal of Finance and Economics, 14: 14-64.
Akbar, M., Ali, S., and Khan, M. F.(2012). The Relationship of Stock Prices and Macroeconomic Variables revisited: Evidence from Karachi Stock Exchange, African Journal of Business Management, 6(4): 1315-1322.
Asaolu, T. O. and Ogunmuyiwa, M.S. (2011). An Econometric Analysis of the Impact of Macroecomomic Variables on Stock Market Movement in Nigeria, Asian Journal of Business Management, 3 (1): 72-78.
Aylward, A. and Glen, J.(2000). Some International Evidence on Stock Price as leading indicators of Economic Activity, Applied Financial Economics, 10(1): 1-14.
Bhattacharyya, B. and Mukherjee, J. (2006). Indian Stock Price Movement and the Macroeconomic context – A Time Series Analysis, Journal of International Business and Economics, 5(1): 167-181.
Brooks. C. (2002). Introductory Econometrics for Finance, 2nd Edition, Cambridge University Press.
Chen, N., Roll, R. and Ross, S. (1986). Economic forces and the Stock Market, Journal of Business, 59: 383-403.
Enders, W. (2004). Applied Econometric Time Series, 2nd edition, Wiley Series in Probability and Statistics.
Engel, R. F. and Granger W.J. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing, Econometrica, 55(2): 251-276.
Engle, R. F. and Rangel, J. G. (2005). The Spline GARCH model for Unconditional Volatility and its Global Macroeconomic Causes, CNB Working Papers Series, 13: 1-28.
Fama, E. F. (1970). Efficient Capital Markets: A review of theory and empirical work, Journal of Finance, 25: 383-417.
Fama, E. F. (1981). Stock Returns, Real Activity, Inflation, and Money, American Economic Review, 71(4): 545-565.
Fama E. F. & Schwert, W.G. (1977). Asset Returns and Inflation, Journal of Financial Economics, 5: 115-146.
Gan, C., Lee, M., Yong, H. and Zhang, J. (2006). Macroeconomic Variables and Stock Market Interactions: New Zealand Evidence. Investment Management and Financial Innovations, 3(4): 89-101.
Johansen, S. and Juselius, K. (1990). Maximum Likelihood Estimation and inference on Cointegration with application to the Demand for Money, Oxford Bulletin of Economics and Statistics, 52(2): 169-210.
Johansen, S. (1991). Estimation and Hypothesis testing of Cointegration Vector in Gaussian Vector Autoregressive Models, Econometrica, 59: 1551-1581.
Maysami, R.C., Howe, L.C. and Hamaz, M.A. (2004), Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of Singapore’s All-S Sector Indices, Jurnal Penguruson, 24: 47-77.
Mookerjee, R. and Yu, Q. (1997). Macroeconomic Variables and Stock Prices in small Open Economy: The case of Singapore, Pacific-Basin Finance Journal, 5: 377-788.
Mukherjee, T.K. and Naka, A. (1995). Dynamic relations between Macroeconomic Variables and the Japanese Stock Market: An application of a Vector Error Correction Model, The Journal of Financial Research, 2: 223-237.
Nelson, C. R. (1976). Inflation and rates of return on Common Stocks, Journal of Finance,31(2): 471-483.
Pal, K. and Mittal, R. (2011). Impact of Macroeconomic Indicators on Indian Indian Capital Markets, Journal of Risk Finance, 12(2): 84-97.
Pethe, A. and Karnik, A. (2000). Do Indian Stock Market Maters? Stock Market Indices and Macroeconomic Variables, Economic and Political Weekly, 35 (5): 349-356.
Rahman, A. Abdul, Noor, Z. Mohd Sidek and Fauziah H. T. (2009). Macroeconomic Determinants of Malaysian Stock Market, African Journal of Business Management, 3(3): 95-106.
Ratanapakorn, O. and Sharma, S. C. (2007). Dynamics analysis between the US Stock Return and the Macroeconomics Variables, Applied Financial Economics, 17(4): 369-377.
Ray, P. and Vani, V. (2003). What moves Indian Stock Market: A study on a linkage with Real Economy in the post reform era, Working Paper, National Institute of Management, Kolkata, 1-19.
Robert, D.G. (2008). Effect of Macroeconomic Variables on Stock Market Returns for four Emerging Economies: Brazil, Russia, India and China. International Business & Economics Research Journal, 7(3): 1-8.
Ross, S. A. (1976). The Arbitrage Theory of Capital Asset Pricing, Journal of Economic Theory, 13: 341-360.
Wongbampo, P. and Sharma, S.C. (2002). Stock Market and Macroeconomic Fundamental Dynamic Interactions: ASEAN-5 Countries. Journal of Asian Economics, 13: 27-51.