Title: Long-run relationship between macroeconomic variables and stock market - evidence from India
Author: Naliniprava Tripathy
Address: Indian Institute of Management Shillong, Meghalaya, 793 014, India
Abstract: This study examines the causal and long-term equilibrium relationships between macroeconomic variables and the Indian stock market during the period January 2005 to December 2009 by using Toda-Yamamoto Granger causality test, Johansen's cointegration tests, variance decomposition and impulse response function. The study finds that stock returns are cointegrated with a set of macroeconomic variables by providing a direct long-run equilibrium relation. Further, the study reveals unidirectional causality between BSE Sensex and S&P 500, BSE Sensex and exchange rate, BSE Sensex and WPI. The impulse response function and variance decomposition additionally support the argument that stock market is a leading indicator of changes in macroeconomic variables.
Keywords: Toda-Yamamoto Granger causality; macroeconomic variables; cointegration; impulse response; India; stock markets; stock returns.
Int. J. of Accounting and Finance, 2012 Vol.3, No.4, pp.291 - 307
Date of acceptance: 12 Jul 2012
Available online: 13 Dec 2012