Analysis of the impact of select macroeconomic variables on the Indian Stock Market: A heteroscedastic cointegration approach

Abstract

The present study examines the impact of the macroeconomic variables on the stock prices in India. To fulfil the objective of the study monthly data of inflation, short-term interest rate, long-term interest rate, index of industrial production, exchange rate, money supply, and the stock indices of CNX Nifty and BSE SENSEX were collected from March 2005 to April 2013. Heteroscedastic cointegration approach was employed using a Johansen test of cointegration, OLS and GARCH (1, 1) model to find out the long-term relationship between the selected macroeconomic variables and the stock prices. It is evident from the study that there exist the long-term heteroscedastic relationships between the stock prices and the macroeconomic variables chosen for the study. Further, it is also evident from the study that while INF, MSE and the IIP are positively related to the stock prices, the SIR, LIR and the EXR are negatively related to the stock prices.JEL Classifications: G10, G12, E31, E44, F31

Do stock markets lead or lag macroeconomic variables? Evidence from select European countries

“…Lagged IR is insignificant in explaining stock prices for the majority of the sampled countries. While this is similar to the Mexican evidence presented by Abugri (2008), it runs counter to prior studies such as Alam (2017) in the context of the Indian markets.…”

“…Studies by Humpe and Macmillian (2009), Adam and Tweneboah (2008), Hussain et al (2013) and Alam (2017) found that interest rates may negatively affect stock prices both directly and indirectly. Peiró (2016) considered the cases of France, Germany and UK and reported that interest rates are key factors in determining stock returns in the short run (but not in the long term) across all countries.…”

“…In the context of thirteen different emerging stock markets, Bai and Green (2010) documented a positive connection between inflation and nominal stock returns. Alam (2017) analysed the impact of several macroeconomic variables on Indian stock indices from 2005 until 2013 using a heteroscedastic cointegration approach and reported a long-term positive link between inflation and stock prices.…”

“…In addition, interest rates affect the cost of funding and therefore impact on the opportunity cost of borrowing and stock prices (Mok, 1993). Another possible explanation for the negative relationship between interest rates and stock prices is that as rates rise, investors substitute stocks in favour of bonds (Alam, 2017). In addition, interest rates constitute a core component of monetary policy, and stock markets not only respond to monetary policy decisions, but also provide feedback to central banks regarding the private sector's expectations about future macroeconomic variables (Bernanke and Gertler, 2000;Bjornland and Leitemo, 2009).…”

“…Japan, yet a positive and insignificant link for the US. Naik and Padhi (2012) and Alam (2017) focused on the Indian market using post-2004 data. Using cointegration approaches, both studies pointed at a significantly positive link between money supply and stock prices.…”