Dynamic Relationship Between Stock Market Sector Indices and Macroeconomic Variables in India

Abstract

This study investigates the long-term and short-term relationships between selected macroeconomic variables and the selected Indian stock market sector indices over the period of 2010 to 2017. The Johansen Co-integration Test, the Vector error correction model (VECM), is applied to calculate the long-term and short-term relationship between sector indices and macroeconomic variables. It is found that stock prices are exposed to macroeconomic factors, but the level of sensitivity is different in different sectors. Out of five sectors taken in the study, it is found that only the realty sector has long run relationship with macroeconomic variables. Other sectors have no long run relationship with macroeconomic variables. Along with this, it is also found that the Auto index has a significant short-term positive relationship with gold prices and the FMCG sector index has a significant short-term positive relationship with industrial production. The consumer price index and exchange rate have significant short run relationship with realty sector index.