A Study on the Relationship Between Selected Macro Economic Variables and Stock Indices

Abstract

newline xii newlineABSTRACT newlineThe mention of the word Stock Markets always arouse an interest, both in the academic world and the investing community. The present study studies the relationship between the selected macroeconomic variables and the benchmark stock index for the Indian Economy. The study evaluates the cointegration, direction of causality, and the impact of the global financial crisis of 2008 on the dynamic interaction between the selected macroeconomic variables and the benchmark stock index. The study is based on the secondary data sourced from mainly Reserve Bank of India database on the Indian Economy, International Monetary Fund Statistics portal, etc. for a period of 1980 to 2019 on a monthly basis. A reduction in range was made as the base year for the NIFTY 50 is December 1995. The selected set of macroeconomic variables for this study includes Consumer Price Inflation Index(CPI), Nominal Foreign Exchange Rate (USD/INR, FX), Foreign Institutional Investors Net Inflows (FII), Gold Prices(GP), Broad Money Supply(M3), Brent Crude Oil Prices(OP), Gross Fiscal Deficit (GFD), Lending Interest Rates(LR), Value of Imports(IX), Value of Exports(EX), Ten Year Government Bond Yield(GSEC), Industrial Production Index (EIPI) and for the benchmark stock index, the study considered NIFTY 50 of the National Stock Exchange. All the variables transformed in their logarithmic form. The study used the Johansen Cointegration technique, Autoregressive Distributed Lag (ARDL) Bound test approach, Granger Causality statistical techniques. For stationarity tests, the study deployed the Augmented Dickey-Fuller Test, Phillips-Perron, and Kwiatkowski Phillips Schmidt Shin test. newlineThe stationarity test results revealed that CPI, EIPI, EX, FX, GP, GSEC, IX, LR, and OP are of the first order of integration; therefore, the Johannsen Cointegration test can be used for testing of long-run relationship. The test results revealed there exists no long-run relationship between NIFTY 50 and the macroeconomic variables on the bi-variate basis. The unit root test results showed that macroeconomic variables FII, M3, GFD are of mixed order of integration, i.e., I(0) and I(1); therefore, ARDL bound test was used to determine the existence of the long-run relationship between them and NIFTY 50 as dependent variable on the bivariate basis. ARDL test output results confirmed the long-run relationship between NIFTY 50 and Foreign Institutional Investors ( FII), the variable FII was significant and had a positive impact in the short- newlinexiii newlinerun, but in the long-run, one lag value of FII was significant and also the difference of FII as well. newlineThe Granger causality results for revealed that unidirectional causality runs from NIFTY 50 to oil prices, Foreign Institutional Investors Net Inflows, Gold prices, Consumer Price Inflation, and bidirectional causality between NIFTY 50 and the Production Index. The relationship between NIFTY 50 as a dependent variable and selected macroeconomic variables as independent, tested through ARDL bound form test, and the results revealed there exists a long-run relationship between NIFTY 50 and macroeconomic variables. The ARDL bound test pre- and post-crisis-2008 revealed that long-run relationships remained intact between NIFTY 50 and macroeconomic variables, but the significance of macroeconomic variables changed pre and post-global financial crisis of 2008.