Causality between Stock Market, Domestic and Global Economic Policy Uncertainty: Evidence from India

Abstract

The aim of this article is to examine the relationship between the Indian stock market and the domestic and global economic policy uncertainty (EPU) during the period: January 2003–June 2020. The study employed unit root tests, Johansen cointegration test, vector error correction model (VECM), Granger causality test and impulse response function (IRF) for the analysis. This study finds the evidence for the presence of long-run equilibrium relationship between the stock market, domestic economic policy uncertainty (DEPU) and global economic policy uncertainty (GEPU) in India. The findings suggest that there is bidirectional causality between DEPU and stock market; however, no causality is found between GEPU and stock market in either direction. Also, it is found that there is bidirectional causality between DEPU and GEPU. The findings of the study may help policymakers to formulate decisive monetary and fiscal policies to achieve financial stability and are important for the financial investors and hedgers for portfolio allocations in India. JEL Codes: C32, D80, G12