What Drives the Stock Market Return in India? An Exploration with Dynamic Factor Model

Abstract

In this article, we examine the role of the institutional investors, both domestic and foreign, in driving the return on the Indian equity market in the last decade. An attempt is made to identify the influence of other possible determinants, more specifically domestic and international financial variables, on the market returns as well. Whether there is a change in the relationship is also studied. The results uncover some interesting facts. First, there is evidence of institutional investors driving the market return after 2008, though it did not have any impact before 2008. Second, the return is significantly led by the movement of interest rates within and outside the country for the entire decade. Third, most of the major and emerging stock markets and the US market also have significant influence on Indian equity market return. Fourth, gold return used to affect the equity market return in pre-2008 years, but it ceased to do so after 2008. The results show that the determinants of the Indian equity market return have changed after the recent economic crisis of 2008. JEL Classification: C53, G11, G21, F32

Pension funds, large capital inflows and stock returns in a thin market

“…Empirical evidence for the Indian stock market shows that domestic and foreign institutional investors have a significant influence on the Indian equity market returns after 2008, although institutional trading was not a determinant of stock price movements before 2008 (Mukherjee and Roy, 2016). The evidence in Lakshman et al (2013) also shows different effects of domestic and foreign institutional investors on herding behavior.…”

Dynamic Nexuses between Macroeconomic Variables and Sectoral Stock Indices: Reflection from Indian Manufacturing Industry

“…The findings of the study are consistent with the outcome of the studies conducted by Suganthi and Dharshanaa (2014), Srivastava and Behl (2015), Acharya et al (2016), Sultana and Reddy (2017) and Mishra (2018). The outcome of the study carried out by Mukherjee and Roy (2016) also showed that the foreign investment had a significant positive effect on the Indian stock market and such effect became stronger in the post 2008 regime.…”

“…Table 3 shows that the elasticity associated with rate of interest (INT) with respect to BSE-BM was found to be negative and statistically significant, which is in line with the accepted theoretical proposition that the rate of interest and the stock price movements are negatively associated. A hike in the rate of interest, on one hand, enhances the cost of borrowings for the firms (Ibrahim & Musah, 2014), while on the other hand, it induces more savings leading to lesser consumption and siphoning the funds from the stock to fixed deposits (Mukherjee & Roy, 2016). This finding is very much consistent with the outcome of the studies conducted by Mukherjee and Naka (1995), Liu and Shrestha (2008), Khan et al (2017) and Shabbir (2018).…”

“…This finding is very much consistent with the outcome of the studies conducted by Mukherjee and Naka (1995), Liu and Shrestha (2008), Khan et al (2017) and Shabbir (2018). In the context of India, Mukherjee and Roy (2016) suggested that stock market return in India gets negatively affected by the increase in the rate of interest internationally and since the interest rate in India is higher than the global rates such impact gets more intensified in the event of change in the domestic rate of interest. However, the effect of the rate of interest was found to be statistically insignificant in the cases of BSE-FMCG, BSE-CDGS, BSE-HC and BSE-IND (except BSE-BM) during the period of study.…”

Examination of the profitability of technical analysis based on moving average strategies in BRICS

“…Emerging markets differ from markets in developing countries insofar as they are closer to the markets of developed countries, making them more dynamic and attractive to foreign investors. On this topic, Mukherjee and Roy (2016) emphasized the relationship between instrument price fluctuations and macroeconomic particularities.…”