A dynamic relationship between crude oil price and Indian equity market: an empirical study with special reference to Indian benchmark index Sensex

Abstract

PurposeThe purpose of the study is to investigate the long-run and short-run dynamic relationship between crude oil prices and the movement of Sensex for the period of 2000–2018.Design/methodology/approachThe study uses the augmented Dickey–Fuller test for the presence of unit root, Johansen cointegration test for estimating the cointegration among the variables. Further, in the case of no cointegration found, the study employed the vector autoregression (VAR) model to estimate the long-run relationship and the Granger causality/Wald test for short-run relationship. The study also conducted tests for the prerequisites of the model: serial correlation, heteroskedasticity and normality of data.FindingsThe study found that both the variables, crude oil prices and Sensex are integrated of order 1, that is, I (1), and there is no cointegration between them. Further, the results proliferated from the VAR model unfold the marked effect of previous month crude oil prices (lag 1) on the movement of Indian stock market represented by Sensex considered as the benchmark index. Furthermore, VAR–Granger causality/block exogeneity Wald tests results indicated that there is a causal relationship between the crude oil prices and Sensex under the VAR environment. The model does not have any serial correlation and heteroskedasticity indicating toward the unbiased and robust estimates.Research limitations/implicationsThe study is conducted till the year 2018, and data for the present period (post-2018) is excluded due to ongoing trade issues between the USA and oil-exporting countries such as Iran. The current COVID-19 outbreak has also put serious issues. Due to limited time and availability of standardized data, researchers have considered Sensex as equity index only, but for more generalized research outcome few other equity indexes could have been taken for study.Originality/valueThe study is completely original in nature and is an extensive study of the relationship between the crude oil price and Indian stock market with reference to causality between the variables.