Abstract
This study examines the causal and long-term equilibrium relationships between macroeconomic variables and the Indian stock market during the period January 2005 to December 2009 by using Toda-Yamamoto Granger causality test, Johansen’s cointegration tests, variance decomposition and impulse response function. The study finds that stock returns are cointegrated with a set of macroeconomic variables by providing a direct long-run equilibrium relation. Further, the study reveals unidirectional causality between BSE Sensex and S&P 500, BSE Sensex and exchange rate, BSE Sensex and WPI. The impulse response function and variance decomposition additionally support the argument that stock market is a leading indicator of changes in macroeconomic variables.
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