Cointegration and Causality between Select Economic Indicators and Indian Stock Market Indices

Abstract

Stock market performance is considered to represent the financial and economic status of a newlinecountry. New theoretical and empirical research works provide support to the growing newlinecontention that the financial development is treated as a precondition for economic growth of a newlinecountry. Therefore, it is important to study the relationship between the economic indicators newlineand stock market indices empirically. The dynamic and volatile stock markets provide scope for newlinein-depth studies to understand the pattern of stock market movements. According to Fama newline(1981), there is a comprehensive group of economic indicators that influence the stock market newlineprices in any country. Duca (2007) argued that countries with better economic growth have newlinebetter stock market performance. The development of the stock market is the outcome of many newlineeconomic indicators like interest rate, inflation rate, FDI, exchange rate, and economic reforms. newlineHence, it is evident that economic growth plays an important role in the stock market newlinedevelopment in both developing and developed economies. newlineMost of the researchers had studied the cointegration and causality of economic indicators with newlinebroad stock indices like NSE Nifty 50 and BSE Sensex of India. It is proven that there are few newlineeconomic indicators which may affect the stock market prices of a country and thus the stock newlinemarkets become sensitive to changes in economic indicators and vice versa. Though there are newlinemany studies on the relationship between macroeconomic variables and stock market indices, newlinethe findings from the literature are mixed and are difficult to generalise the results because each newlinemarket is unique regarding rules, regulations, and type of investors. The findings of each study newlineare sensitive to the choice of countries, variable selection, and the period studied. However, to newlinethe best of researcher s knowledge, studies on the aggregate effect of the economic indicators newlineon the stock market are minimal.