Computing Causality Between Macro-economic Indicators and Indian Financial Markets

Abstract

Listen

Translate article

AbstractNumerous studies conducted on emerging market economies have suggested that equity and debt markets truly reflect the economy’s financial health. Macroeconomic events have an influence on financial markets. In order to effectively diversify our portfolio, it is imperative to analyse the various financial market interrelationships. During turbulent times these inter dependencies are supposedly stronger between markets as compared to the calmer financial periods. This fact was especially visibly evident, during the global financial crisis. Hence, the predictability of stock return interrelationships is a critical topic that is frequently discussed in empirical studies. The paper considers the role of macroeconomics indicators in order to understand the dynamics of various interrelationships that exist in financial markets. The main aim of this study is to examine the relationship between market returns and a set of macroeconomic variables for different economies using annual data from the year 2000 to 2020. The results of the study primarily prove that there is co-integration between some macroeconomic variables and different stock indices which are indicative of a long-run relationship. The study highlights the impact of macroeconomic variables on the stock market performance of a developing economy, whose performance can be measured by the macroeconomic variables. It also confirms the presence of autocorrelation in different markets and macro-economic variables implying that markets fall into a form of Efficient Market Hypothesis. It suggests that any change of exchange rate, interest rate and other indicators significantly influences the stock market in the economy and vice versa. The study delineates the unidirectional causality moving from international stock markets to domestic stock markets, exchange rates, interest rates, and inflation rates indicating substantial impact on the stock market movement for our considered study period.KeywordsMacroeconomicsGDPForeign exchange rateInflationInterest rateUnemploymentNiftySensex