A dynamic causality analysis between gold price movements and stock market returns: Evidence from India

Abstract

Indian economy is a developing economy and one of the largest gold importers globally. During the financial year 2016-17 India imported around 550 tonnes of the metal and during the financial year, it will jump to 846 tonnes (MMTC-PAMP). According to the Ministry of Commerce & Industry (August 2017), the Imports during May 2017 which were valued atUS $ 35462.79 million (Rs 226849.74 crore) and gold showing the highest growth rate (68.90%) growth in August 2017 over the corresponding month of last year. This paper empirical evidence on the relationship between the gold price and the NSE Nifty stock index in India by using monthly data from January 2001 to December 2017. The Augmented Dickey-Fuller unit root test, Granger Causality Test and Johansen’s Co-integration test have been applied. Results of the Johansen’s Co-integration indicate that there is long-run equilibrium relationship between gold price and stock returns. Further, the Granger causality test results indicate that there is no causal relation between gold and stock return and finally the impulse response functions show that the gold and the response of the stock return is positive at each time responsive period and it can be said that the response of both the variables has a smooth fluctuation in upcoming 10th period. Keywords: Gold Prices, Stock Market Return, Nifty, Granger Causality Test and Johansen’s Co-Integration Test. JEL Classification: C32, F13, F43, G12.