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Stock market and macroeconomic variables: new evidence from India

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  • R. Gopinathan

    (Shri Mata Vaishno Devi University)

  • S. Raja Sethu Durai

    (University of Hyderabad)

Abstract

Understanding the relationship between macroeconomic variables and the stock market is important because macroeconomic variables have a systematic effect on stock market returns. This study uses monthly data from India for the period from April 1994 to July 2018 to examine the long-run relationship between the stock market and macroeconomic variables. The empirical findings suggest that standard cointegration tests fail to identify any relationship among these variables. However, a transformation that extracts the actual functional relationship between these variables using the alternating conditional expectations algorithm of (J Am Stat Assoc 80:580–598, 1985) identifies strong evidence of cointegration and indicates nonlinearity in the long-run relationship. Further, the continuous partial wavelet coherency model identifies strong coherency at a lower frequency for the transformed variables, establishing the fact that the long-run relationship between stock prices and macroeconomic variables in India is nonlinear and time-varying. This evidence has far-reaching implications for understanding the dynamic relationships between the stock market and macroeconomic variables.

Suggested Citation

  • R. Gopinathan & S. Raja Sethu Durai, 2019. "Stock market and macroeconomic variables: new evidence from India," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-17, December.
    • Handle: RePEc:spr:fininn:v:5:y:2019:i:1:d:10.1186_s40854-019-0145-1
    DOI: 10.1186/s40854-019-0145-1
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