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Empirical Relationship between Macroeconomic Variables and Stock Prices of Indian Banking Sector: A Vector Error Correction Model Approach

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  • Aastha Khera
  • Neelam Dhanda

Abstract

This existing study aims to investigate the relationship between Indian Banking stock market prices and macroeconomic variables. The proxy for the Indian Banking stock market is Nifty Bank while Foreign Reserve, Exchange Rate (Indian vs US Dollar), Interest rate, and CPI are proxies of macroeconomic variables. Johansen Cointegration and Vector Error Correction Model (VECM) on monthly data from January 2013 to July 2020 have been applied. Considering the results of cointegration, it is found that there is a long-run association between the Indian Banking stock market and constituent macroeconomic variables. Next, the employment of VECM is done for inspecting long run and short-run causality. The result reveals long-run equilibrium in Indian commercial bank’s stock prices coming from macroeconomic variables. This study has considerable imputations that investors can diversify their portfolio according to the influencing power of constituent selected macro-economic variables in the short run and the long run. Exchange rate and foreign reserves drive the banking stock market in the short run whereas CPI and Interest rate do not create any significant impact.

Suggested Citation

  • Aastha Khera & Neelam Dhanda, 2020. "Empirical Relationship between Macroeconomic Variables and Stock Prices of Indian Banking Sector: A Vector Error Correction Model Approach," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 12(2), pages 189-198, December.
    • Handle: RePEc:rfb:journl:v:12:y:2020:i:2:p:189-198
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