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Frequency domain causality analysis of stock market and economic activity in India

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  • Tiwari, Aviral Kumar
  • Mutascu, Mihai Ioan
  • Albulescu, Claudiu Tiberiu
  • Kyophilavong, Phouphet

Abstract

In this study, we analyze the Granger-causality in frequency domain between stock prices and economic growth in India, in order to identify the direction of the causality at different frequencies. For this purpose we use in the first step different seasonal and structural breaks unit root tests. In the second step we use a conditional VAR model as benchmark, and we focus on the conditional and non-conditional frequency domain causality tests. We find evidence of unidirectional causal relationship between stock prices and industrial production in the long-run, running from stock prices to industrial production. When using the non-conditional model, we find evidence of insignificant business cycle causality from both directions. Our study shows that stock prices are a leading indicator for growth in the industrial production in India. In this case, in order to adjust the industrial production in the long-term, the Indian economic policies should be focused with predilection on the stock market environment.

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  • Tiwari, Aviral Kumar & Mutascu, Mihai Ioan & Albulescu, Claudiu Tiberiu & Kyophilavong, Phouphet, 2015. "Frequency domain causality analysis of stock market and economic activity in India," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 224-238.
    • Handle: RePEc:eee:reveco:v:39:y:2015:i:c:p:224-238
    DOI: 10.1016/j.iref.2015.04.007
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    Cited by:

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    10. Prats Albentosa, María Asuncíon & Sandoval, Beatriz, 2020. "Does stock market capitalization cause GDP? A causality study for Central and Eastern European countries?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 14, pages 1-29.
    11. Kee Tuan Teng & Siew Hwa Yen & Soo Y. Chua & Hooi Hooi Lean, 2016. "Time-Varying Linkages of Economic Activities in China and the Stock Markets in ASEAN-5," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 10(2), June.
    12. Tiwari, Aviral Kumar & Jena, Sangram Keshari & Mitra, Amarnath & Yoon, Seong-Min, 2018. "Impact of oil price risk on sectoral equity markets: Implications on portfolio management," Energy Economics, Elsevier, vol. 72(C), pages 120-134.
    13. Sangram Keshari Jena & Aviral Kumar Tiwari & Shawkat Hammoudeh & Muhammad Shahbaz, 2020. "Dynamics of FII flows and stock market returns in a major developing country: How does economic uncertainty matter?," The World Economy, Wiley Blackwell, vol. 43(8), pages 2263-2284, August.
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    More about this item

    Keywords

    Stock market; Economic activity; Frequency domain Granger-causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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