Causal Relationship Between Stock Market and Macroeconomic Variables: Indian Evidence
Keywords:
Co-integration, VECM, Causality, GDP, FDI, Export, ImportAbstract
Co-integration and causality are now recognised as the important modelling techniques for investigate the behaviour of macroeconomic variables. This study is conducted based on the above two techniques under VAR environment by considering annual data over a period from 1st April 1979 to 31st March 2020. The macroeconomic variables become stationary after first difference based on ADF and PP tests and integrated in the same order with optimum lag order of one. According to the Johansen co-integration test, three co-integrated equations are found which indicates presence of long-run equilibrium relationships and later confirmed by the VECM analysis when BSE is considered as the dependent variable. Even if, the evidence of short-run bilateral causality is observed between import and GDP and presence of uni-directional Granger causality is also seen from export to import.
References
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37. Paulsen, J., & Tjostheim, D. (1985). On the estimation of residual variance and order in autoregressive time series. Journal of the Royal Statistical Society, 47(2), 216-228.
38. Phillips, P.C.B., & Ouliaris, S. (1987). Asymptotic properties of residual based tests for co-integration. Econometrica, 58, 165-193.
39. Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.
40. Phillips, P.C.B. (1991). Optimal inference in co-integrated systems. Econometrica, 59, 283-306.
41. Phylaktis, K., & Ravazzolo, F. (2005). Stock prices and exchange rate dynamics. Journal of International Money and Finance, 24, 1031-1053.
42. Pal, K., & Mittal, R. (2011). Impact of macroeconomic indicators on Indian capital markets. The Journal of Risk Finance, 12(2), 84-97.
43. Plihal, T. (2016). Stock market informational efficiency in Germany: Granger causality between DAX and selected macroeconomic indicators. Procedia-Social and Behavioural Sciences, 321-329.
44. Quinn, B.G. (1980). Order determination for a multivariate auto-regression. Journal of the Royal Statistical Society, 42(2), 182-185.
45. Roll, R., & Ross, S. A. (1980). An empirical investigation of the arbitrage pricing theory. The Journal of Finance, XXXV(5), 1073-1103.
46. Stock, J.H., & Watson, M.W. (1988). Testing for common trends. Journal of the American Statistical Association, 83, 1097-1107.
47. Tripathi, V., & Seth, R. (2014). Stock market performance and macroeconomic factors: The study of Indian equity market. Global Business Review, 15(2), 291-316.
48. Wooldridge, J.M. (2009). On estimating firm level production functions using proxy variables to control for unobservable, Economics Letters, 104(3), 112-114.
2. Asteriou, D., & Hall, S.G. (2007). Applied Econometrics: A modern approach using Eviews and Microfit, Revised Edition. Palgrave Macmillan.
3. Abdelaziz, M., Chortareas, G., & Cipollini, A. (2008). Stock prices, exchange rates and oil: evidence from Middle East Oil-exporting countries. University of Essex working paper.
4. Ali, A. A., Ali, S. Y. A., & Dalmar, S. M. (2018). The impact of imports and exports performance on the economic growth of Somalia. International Journal of Economics and Finance, 10(1), 110-119.
5. Braun, P.A., & Mittnik, S. (1993). Misspecifications in vector auto-regressions and their effects on impulse responses and variance decompositions. Journal of Econometrics, 59, 319-341.
6. Bahmani, O.M., & Rhee, H.J. (1997). Are exports and imports of Korea co-integrated?. International Economic Journal, 11(1), 109-114.
7. Bhattachatya, B., & Mukherjee, J. (2003). Causal relationship between stock market and exchange rate. Foreign exchange reserves and value of trade balance: a case study for India. The 5th annual conference on money and finance in the Indian economy on January 2003.
8. Dickey, D. A., & Fuller, W. A. (1979). Distribution of estimations of autoregressive time series with a unit root. Journal of American Statistical Association, 74, 427-431.
9. Dasgupta, R. (2012). Long-run and short-run relationships between BSE Sensex and macroeconomic variables. International Research Journal of Finance and Economics, 95, 135-150.
10. Demir, C. (2019). Macroeconomic determinants of stock market fluctuations: the case of BIST-100. Economics, 7(8), 1-14.
11. Engle, R.F., & Granger, C.W.J. (1987). Co-integration and error correction: Representation, estimation and testing, Econometrica, 55, 251-276.
12. Engle, R.F., & Yoo, S.B. (1987). Forecasting and testing in co-integrated systems. Journal of Econometrics, 35, 143-159.
13. Engle, R.F., & Yoo, S.B. (1987). Co-integrated economic time series: An overview with new results. Oxford:Oxford University Press, 237-266.
14. Enders, K. C. (2010). Applied missing data analysis, The Guilford Press, New York.
15. Fisher, R.A. (1948). Answer to question 14 on combining independent tests of significance. The American Statistician, 2, 30-31.
16. Fang, W., & Millar, S. M. (2002). Currency depreciation and Korean stock market performance during the Asian financial crisis. Working paper 2002-30, University of Connecticut.
17. Granger, C.W.J. (1981). Some properties of time series data and their use in econometric model specification. Journal of Econometrics, 16(1), 121-130, May.
18. Gjerde, Q., & Saettem, F. (1999). Causal relations among stock returns and macroeconomic variables in a small, open economy. Journal of International Financial Markets, Institutions and Money, 9(1), 61-74.
19. Harris, R. I. D. (1995). Using co-integration analysis in economic modelling. Prentice Hall.
20. Hussainey, K., & Ngoc, L.K. (2009). The impact of macroeconomic indicators on Vietnamese stock prices. The Journal of Risk Finance, 10(4), 321-332.
21. Humpe, A., & Macmillian, P. (2009). Can macroeconomic variables explain long term stock market movements? A comparison of the US and Japan. Applied Financial Economics, 19(2), 111-119.
22. Jarque, C.M., & Bera, A.K. (1981). Efficient tests for normality, homoscedasticity and serial independence of regression residuals: Monte Carlo evidence. Economics Letter, 7, 313-318.
23. Johansen, S. (1988). Statistical analysis of co-integration vectors. Journal of Economic Dynamics and Control, 12, 231-254.
24. Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inferences on co-integration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210.
25. Johansen, S. (1991). Estimation and hypothesis testing of co-integrated vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551-1580.
26. Johansen, S. (1991). The role of constant and linear terms in co-integration analysis of non-stationary variables. Econometric Reviews, 13, 205-229.
27. Kim, K. H. (2003). Dollar exchange rate and stock price: evidence from multivariate co-integration and error correction model. Review of Financial Economics,12(3), 301-313.
28. Kotha, K. K., & Sahu, B. (2016). Macroeconomic factor and the Indian stock market: exploring long and short run relationships. International Journal of Economics and Financial Issues, 6(3), 1081-1091.
29. Latha, K., Gupta., & Kumar, A. (2016). Relationship between Indian stock market performance and Macroeconomic variables: An empirical study. International Journal of Financial Markets, 2(4), 109-121.
30. Muhammad, N., & Rasheed, A. (2002). Stock prices and exchange rates: are they related? Evidence from South Asian countries. Unpublished manuscript, Karachi University.
31. Masuduzzaman, M. (2012). Impact of macroeconomic variables: the case of Germany and the United Kingdom. Global Journal of Management and Business Research, 12(6), 22-34.
32. Maysami, R. C., & Koh, T. S. (2000). A vector error correction model of the Singapore. International Review of Economics and Finance. 9, 79-96.
33. Mukherjee, T. T., & Naka, A. (1995). Dynamic relations between macroeconomic variables and the Japanese stock market: an application of a vector error correction model. The Journal of Financial Research, 18, 223-237.
34. Nieh, C. C., & Lee, C. F. (2001). Dynamic relationship between stock prices and exchange rates for G7 countries. Quarterly Review of Economics and Finance, 41(4), 477-490.
35. Naik, P. K., & Pahdi, P. (2012). The impact of macroeconomic fundamentals on stock prices revisited: evidence from India. Eurasian Journal of Business and Economics, 5(10), 25-44.
36. Alam, N. (2017). Analysis of the impact of select macroeconomic variables on the Indian stock market: A heteroscedastic co-integration approach. BEH-Business and Economic Horizons, 13(1), 119-127.
37. Paulsen, J., & Tjostheim, D. (1985). On the estimation of residual variance and order in autoregressive time series. Journal of the Royal Statistical Society, 47(2), 216-228.
38. Phillips, P.C.B., & Ouliaris, S. (1987). Asymptotic properties of residual based tests for co-integration. Econometrica, 58, 165-193.
39. Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.
40. Phillips, P.C.B. (1991). Optimal inference in co-integrated systems. Econometrica, 59, 283-306.
41. Phylaktis, K., & Ravazzolo, F. (2005). Stock prices and exchange rate dynamics. Journal of International Money and Finance, 24, 1031-1053.
42. Pal, K., & Mittal, R. (2011). Impact of macroeconomic indicators on Indian capital markets. The Journal of Risk Finance, 12(2), 84-97.
43. Plihal, T. (2016). Stock market informational efficiency in Germany: Granger causality between DAX and selected macroeconomic indicators. Procedia-Social and Behavioural Sciences, 321-329.
44. Quinn, B.G. (1980). Order determination for a multivariate auto-regression. Journal of the Royal Statistical Society, 42(2), 182-185.
45. Roll, R., & Ross, S. A. (1980). An empirical investigation of the arbitrage pricing theory. The Journal of Finance, XXXV(5), 1073-1103.
46. Stock, J.H., & Watson, M.W. (1988). Testing for common trends. Journal of the American Statistical Association, 83, 1097-1107.
47. Tripathi, V., & Seth, R. (2014). Stock market performance and macroeconomic factors: The study of Indian equity market. Global Business Review, 15(2), 291-316.
48. Wooldridge, J.M. (2009). On estimating firm level production functions using proxy variables to control for unobservable, Economics Letters, 104(3), 112-114.
Published
2020-10-06
How to Cite
Roy, S. . (2020). Causal Relationship Between Stock Market and Macroeconomic Variables: Indian Evidence: Array. EuroEconomica, 39(3). Retrieved from https://dj.univ-danubius.ro/index.php/EE/article/view/535
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