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Relationship between macroeconomic variables and stock market index: evidence from India

Author

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  • Pathan, Rubina
  • Masih, Mansur

Abstract

The purpose of this paper is to study the direction of causality between the stock market and macroeconomic variables. India is taken as a case study. Although, there have been many studies which attempted to find out the relationship between Indian stock market and economic variables, this paper is a fresh attempt to investigate the cointegrating relationship and Granger-causality between the variables. The paper considers the monthly data of major macroeconomic variables which are interest rate, money supply, wholesale price index, and exchange rate and also an important variable for any stock market and economy which is Foreign Institutional investment. Our findings provide evidence of a stable long run equilibrium relationship between the stock market and economic growth in India. The study reconfirms the traditional belief that the real economic variables continue to affect the stock market in the post-reform era in India and also highlights the insignificance of certain variables with respect to stock market. The study also discerns the Granger-causal chain among the variables. This has an important policy implication for the national policy makers, researchers, corporate managers and regulators.

Suggested Citation

  • Pathan, Rubina & Masih, Mansur, 2013. "Relationship between macroeconomic variables and stock market index: evidence from India," MPRA Paper 63302, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:63302
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    File URL: https://mpra.ub.uni-muenchen.de/63302/1/MPRA_paper_63302.pdf
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    References listed on IDEAS

    as
    1. Mansor H. Ibrahim & Hassanuddeen Aziz, 2003. "Macroeconomic variables and the Malaysian equity market: A view through rolling subsamples," Journal of Economic Studies, Emerald Group Publishing, vol. 30(1), pages 6-27, January.
    2. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    3. David Lovatt & Ashok Parikh, 2000. "Stock returns and economic activity: the UK case," The European Journal of Finance, Taylor & Francis Journals, vol. 6(3), pages 280-297.
    4. Mansor H. Ibrahim and Wan Sulaiman Wan Yusoff, 2001. "Macroeconomic Variables, Exchange Rate And Stock Price: A Malaysian Perspective," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 9(2), pages 141-164, December.
    5. Bilson, Christopher M. & Brailsford, Timothy J. & Hooper, Vincent J., 2001. "Selecting macroeconomic variables as explanatory factors of emerging stock market returns," Pacific-Basin Finance Journal, Elsevier, vol. 9(4), pages 401-426, August.
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    More about this item

    Keywords

    stock market; macrovariables; India;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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