Title: A linear model for determinants of NIFTY based on co-integrated variables

Authors: R. Subathra; A. Kachi Mohideen

Addresses: Department of Statistics, Government Arts College (Autonomous), Salem – 636 007, Tamil Nadu State, India ' PG and Research Department of Statistics, Periyar E.V.R. College (Autonomous), Trichy – 620 023, Tamil Nadu State, India

Abstract: The performance of the stock market determines the wealth and performance of an economy. This paper provides a financial econometric analysis of the Indian stock market with specific reference to NIFTY. Since the economic time series are rarely stationary, this paper considers only those variables which co-integrate with NIFTY, as explanatory variables. The co-integrating variables are identified using the Engle-Granger method. The identified macro economic variables are regressed on NIFTY. Since the multiple regression model contains many insignificant coefficients, the presence of multicollinearity is suspected and tested. To overcome this problem, factor analysis of the explanatory variables is carried out and the factor scores are used as input for the linear programming model. The application of simplex method to this model gives the optimum situation in which NIFTY reaches its optimum level. The findings reveal that in Indian situation the currency depreciation will result in higher exports and this will eventually raise the stock prices which then leads to higher corporate profits in the short-run. Also, high rates of inflation increase the cost of living thereby eroding the purchasing power of income. This shifts resources from investments to consumption leading to a fall in the demand for market instrument which in turn reduces the stock index value.

Keywords: co-integration; unit roots; stationarity; multiple regression modelling; multicollinearity; factor analysis; sampling adequacy; linear programming; co-integrated variables; stock market performance; econometrics; India; currency depreciation; exports; stock prices; corporate profits; inflation; purchasing power.

DOI: 10.1504/IJEBR.2016.076147

International Journal of Economics and Business Research, 2016 Vol.11 No.3, pp.183 - 194

Received: 24 Oct 2015
Accepted: 07 Nov 2015
Published online: 27 Apr 2016 *

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