Cointegration and Causality of Macroeconomic Variables towards BSE Sensex Returns

Abstract

In the recent scenario, economic variables play a vital role in the stock market all over the world. The present study investigates that causal relationship between Bombay Stock Exchange Sensex returns and macroeconomic variables. This study was based on monthly data, collected from RBI handbook statistics, from first May 2003 to June 31 2013. The study used tools like Augmented Dickey Fuller test, Co-integration Test and Granger Causality Test for analyzing the relationship between BSE Sensex returns and macroeconomic variables. The study concluded that exchange rate and foreign exchange reserve recorded unidirectional causal relationship with BSE Sensex returns. The study results revealed that all macro-economic variables had long run relationship with BSE Sensex returns and the information efficiency of exchange rate was the real output, represented in change in the BSE Sensex returns.