Causal Analysis of Stock Prices and Macroeconomic Variables: Evidence from Indian Stock Market

Abstract

Macroeconomic factors play a major role in shaping the capital markets of both developed and developing countries. The present study has been undertaken to evaluate the causal relationships between the stock prices represented by the NIFTY 200 monthly closing index prices and macroeconomic variables namely inflation, money supply growth, interest rates, exchange rates and foreign institutional investments both for the short-run and the long-run. The autoregressive distributed lag (ARDL) model has been used in the study to determine the causal relationships between the selected macroeconomic variables and Indian stock prices from 2010 to 2020. The findings of the study indicate that in the long run, the macroeconomic variables have an insignificant impact on stock prices. In the short run, however, inflation and foreign portfolio investments have a positive impact on stock prices, while exchange rates have a negative impact on stock prices.