Empirical Study on Business and Emotions (Market) Cycles and Sector Performance in Indian Stock Market

Abstract

Business cycles and Market cycles are related, but they both have distinct attributes. The market cycle refers to the ups and downs of the financial market, while the business cycle refers to the ups and downs of the overall economy. The performance of particular sectors in stock market depends on the business cycle. Fluctuations in the business cycle are essentially create distinct changes in the rate of growth in economic activity, particularly changes in three key cycles namely the corporate profit cycle, the credit cycle, and the inventory cycle. Any unforeseen macroeconomic events or shocks can disrupt a trend in market cycle. Changes in these key indicators historically have provided a relatively reliable guide to recognizing the different phases of an economic cycle. The research on interaction between business cycle and market cycle related to Indian stock market is limited. The recent government changes and expectation of policy reforms has made the momentum, which created a new phase in market cycle through regaining of investor confidence in equity market. In this study the researcher wants to find out what are the sectors attracted for investment, factors influencing the creation and sustainability of phase in market cycle. For this research specific sector wise index of NSE and economic variables and FII Sector wise investment data from Jan 2012 to Dec 2014 is selected and collected for finding the relationship between the business and stock market cycle. The research will help to find the conformity of theory and reality, reveal the factors creating the momentum and sector wise performance. GARCH model is employed to find out the relationship between economic variable and sector wise performance.