Title: Long-run relationship between macroeconomic variables and stock market - evidence from India

Authors: Naliniprava Tripathy

Addresses: 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.

DOI: 10.1504/IJAF.2012.051002

International Journal of Accounting and Finance, 2012 Vol.3 No.4, pp.291 - 307

Accepted: 12 Jul 2012
Published online: 13 Dec 2012 *

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