An Empirical Analysis on Association Between Selected Macroeconomic Variables and Stock Market in the Context of BSE

Abstract

The role of macroeconomic variables cannot be ignored because it plays a very important role in shaping the economy of any country, irrespective of whether it is developing, underdeveloped or developed. The macroeconomic variables were disposable income (DI), government policies (GP), inflation rate (INF), interest rate (IR), exchange rate (ER) and stock price. Monthly data of 10 years were used, that is, from April 2006 to March 2016. Analyses of augmented Dickey–Fuller test, preliminary tests, stability tests, cointegration, vector error correction model (VECM) variance decomposition analysis (VDA) and impulse response have been applied to examine the association between the selected macroeconomic variable and stock returns. All the variables are stationary at 1st difference. The results showed that the residues are normally distributed and that there is no problem of multicollinearity, heteroskedasticity and serial correlation. The results of the cointegration showed a strong long-term relationship among DI, GP, the inflation rate, the exchange rate and the IR on the stock price in Bombay Stock Exchange of India. Results of vector error correction model revealed that in the short run, there was a negative and significant relationship between inflation rate and stock returns; therefore, it can be implied that an increase in the inflation rate eroded the prospect of positive performance among the Sensex but was not significant. JEL Classification: E, E01

Gold-oil-exchange rate volatility, Bombay stock exchange and global financial contagion 2008: Application of NARDL model with dynamic multipliers for evidences beyond symmetry

“…In long run and before the global financial crisis, only negative shocks associated with exchange rate fluctuation, gold prices, and oil prices are value relevant for investors as investors give much importance to episodes of currency devaluations and positive shocks associated with gold prices and oil prices. Positive shocks to exchange rate fluctuations means that dollar prices appreciated against local rupee value, which can be a favorable outcome for economies relying on exports rather than import centric economies (Alkhuzaie & Asad, 2018;Asad et al, 2019;Asad & Qadeer, 2014;Keswani & Wadhwa, 2018). However, after the economic crunch, both positive and negative fluctuations in exchange rates remain no longer value relevant for investors.…”

“…This research is also relevant for academicians to consider the period while finding out possible linkages between stock indexes, oil prices, gold prices, and exchange rate fluctuations. Another theoretical contribution is added to existing literature that there is the asymmetrical or nonlinear association between variables which are assumed to be linear by (Sahu et al, 2014;Shiva & Sethi, 2015;Tehreem, 2018;Keswani & Wadhwa, 2018;Neveen, 2018;Rajesh, 2019). Moreover, in existing literature few researchers have utilized arbitrage pricing theory to explain symmetrical connotations between macroeconomic fluctuations and stock indexes (Christofi et al, 1993;Günsel et al, 2009;Mollick & Nguyen, 2015;Saumya, 2012;Shahzad et al, 2017;Yan & Yang, 2016) while others have utilized EMH (Wickremasinghe, 2011;Hatemi-J, 2012;Singhania & Prakash, 2014;Othman et al, 2019).…”

“…We have identified the following four most important research gaps in the existing literature. Firstly, in existing literature number of research articles have only explored linear linkages between stock indexes, exchange rate fluctuations, oil price volatilities, and gold prices by utilizing linear models like VECM (Badry, 2019;Keswani & Wadhwa, 2018;Neveen, 2018;Rajesh, 2019;Sahu et al, 2014;Shiva & Sethi, 2015), VAR (Areli Bermudez Delgado et al, 2018;Ghulam, 2018;Huang et al, 2018), ARDL modeling approach (Ho, 2018;Singhal et al, 2019) and limited efforts have been made to explore the asymmetrical impact of Exchange rates-Gold-Oil price volatility on stock indexes by using NARDL model by (Shin et al, 2014).…”

“…Chiang, Leong, and Hui (2014) suggested that fluctuations in capital flow and industrial output framed direct association with stock indexes and volatility of other macroeconomic indicators such as currency fluctuations, cost of borrowing and inflation formulates indirect linkages with stock returns of the Singapore hotel industry. Macroeconomic variations played an important contributing role in inflicting volatility to stock prices of a country, irrespective of the economy is either developed, emerging, or developing (Keswani & Wadhwa, 2018).…”

Do Exogenous Shocks in Macroeconomic Variables Respond to Changes in Stock Prices?

“…A strong longrun cointegration relationship had been seen between stock market returns along with macroeconomic variables. Increases in the inflation rate eroded the panorama of the positive performance of the Sensex, but it was not significant [30]. The study employed certain macroeconomic factors and analysed their influence on stock market returns in order to create a (CCA) canonical association analysis model for ZSE "Zimbabwe stock exchange".…”