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Macroeconomic surprises and stock market responses—A study on Indian stock market

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  • Santanu Pal
  • Ajay K Garg

Abstract

This study analyzes the sensitivity of a series of Indian stock indices for the astonishing component of monetary and macroeconomic policy with the data set from 1 April 2004 to 31 July 2016. The immediate impact is assessed with event analysis, and the dynamic effect is analyzed with the Vector Autoregression (VAR) model. The result of the event analysis indicates that the monetary policy surprise significantly affects the stock market and is more prominent than that of other macroeconomic surprises. Unlike the event study, the VAR analysis found that the other macroeconomic surprise also affects stock return. The study also highlights the industry effect and size effect, which is coherent with the predictions of the CAPM (Capital Asset Pricing Model) model. While many studies have been conducted on the monetary policy surprise in the developed economy, there are relatively few studies on macroeconomic surprises. Some studies conducted in India have analyzed the impact of monetary policy surprises on stock price; however, to the best of our knowledge, none of the studies has examined the simultaneous effect of both macroeconomic and monetary policy surprise. The study is relevant because the responses differ across sectors and vary with firm sizes. Thus, the study can effectively be used as a hedging instrument. Furthermore, the stock market acts as a vital channel for policy transmission and a critical decision driver for corporate finance. The understanding of firm and stock market dynamics against macroeconomic surprises can help policymakers in enhancing policy effectiveness and corporate finance professionals in improving decision-making.

Suggested Citation

  • Santanu Pal & Ajay K Garg, 2019. "Macroeconomic surprises and stock market responses—A study on Indian stock market," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1598248-159, January.
    • Handle: RePEc:taf:oaefxx:v:7:y:2019:i:1:p:1598248
    DOI: 10.1080/23322039.2019.1598248
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    Cited by:

    1. Mahesh Dahal & Joy Das, 2021. "Governmental Announcements and Indian Stock Market: Evidence from Indian Manufacturing Sector," 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. 13(2), pages 134-146, December.
    2. Ibrahim Bello Abdullahi, 2020. "Effect of Unstable Macroeconomic Indicators on Banking Sector Stock Price Behaviour in Nigerian Stock Market," International Journal of Economics and Financial Issues, Econjournals, vol. 10(2), pages 1-5.
    3. de Mendonça, Helder Ferreira & Díaz, Raime Rolando Rodríguez, 2023. "Can ignorance about the interest rate and macroeconomic surprises affect the stock market return? Evidence from a large emerging economy," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    4. Cordelia Onyinyechi Omodero & Dorcas Titilayo Adetula & Kingsley Adeyemo, 2021. "Stock Market Reaction to Monetary Policy Modifications: Evidence from an Emergent Market," Academic Journal of Interdisciplinary Studies, Richtmann Publishing Ltd, vol. 10, May.

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