Macroeconomic indicators and stock prices: Indian evidence

Abstract

This paper attempts to study the relationship of stock returns with macroeconomic variables in Indian context. The data consists of 88 months from April 1996 to July 2003 comprising of all monthly macro indicators. We have considered 10 macro variables for the study: WPI, Exchange Rate, IIP, Foreign exchange Reserves, Stock Index, M3, Oil price index, Real Effective Exchange rate, 91-day Treasury Bills yield as well as 10-year yields. The study finds a long-term equilibrium relationship among the macroeconomic variables and stock market indicator through Johansen's cointegration test. The Granger Causality test finds short-term dynamics among macro variables. The Vector Error Correction Model (VECM) of Johansen illustrates that stock prices are co-integrated with the set of macroeconomic variables considered under the study. An OLS regression is done on first differences to study the robustness of the relationship among the macroeconomic variables. This robustness test gives us the result that the oil prices have a significant influence on stock price returns. The relationship of stock returns with other macroeconomic variables are not found to be significant except in case of exchange rate.