Analyzing Dynamic Relationship between Gold Price and Indian Stock Market: An Empirical Study

Abstract

Gold is widely used as a mean to store value and also used as a tool to hedge against inflation. Increase and decrease in gold price is said to affect the capital market of a country and thus gold price is also said to be one of the variable that affects the health of the economy. The present study intends to examine the dynamic relationship between Gold price and Indian Stock market. This study is conducted for the period from January 1, 2008 to December 31, 2016. Unit Root Test, Cointegration test, Standard Granger Causality test, Variance Decomposition test and Impulse Response test are being conducted for the purpose of this analysis. Data was found to be stationary in first difference whereas the variables were not found to have a long term relationship among them. In absence of cointegration between the variables, Classical Granger Causality test has been conducted to check whether one variable causes the other. The study evidences a bidirectional causality between Sensex and Gold prices and unidirectional causality flowing from Gold prices to Nifty. The result of Variance Decomposition test revealed that Indian Stock market and gold prices are strongly exogenous during the period under study. Finally, Impulse Response Test revealed that positive shocks in Gold prices have very little but persistence and increasing effect on Indian Stock market. The study will enhance the understanding of relation between gold price and Indian stock market and will also help the foreign investors to understand the Indian stock market with respect to movement of gold prices.