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Relationship between macroeconomic variables and stock market index: evidence from India

Pathan, Rubina and Masih, Mansur (2013): Relationship between macroeconomic variables and stock market index: evidence from India.

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Abstract

The purpose of this paper is to study the direction of causality between the stock market and macroeconomic variables. India is taken as a case study. Although, there have been many studies which attempted to find out the relationship between Indian stock market and economic variables, this paper is a fresh attempt to investigate the cointegrating relationship and Granger-causality between the variables. The paper considers the monthly data of major macroeconomic variables which are interest rate, money supply, wholesale price index, and exchange rate and also an important variable for any stock market and economy which is Foreign Institutional investment. Our findings provide evidence of a stable long run equilibrium relationship between the stock market and economic growth in India. The study reconfirms the traditional belief that the real economic variables continue to affect the stock market in the post-reform era in India and also highlights the insignificance of certain variables with respect to stock market. The study also discerns the Granger-causal chain among the variables. This has an important policy implication for the national policy makers, researchers, corporate managers and regulators.

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