Abstract
Thisstudy analyses the empirical interdependence among asset returns, industrialgrowth and inflation after controlling for interest rate by consideringstochastic seasonality and conditional volatility with monthly time series inIndia. The HEGY unit root test suggests that industrial growth and inflationexperience only stochastic trend and no persistent stochastic behaviour at anyother seasonal frequencies, while stock return follows persistent seasonaltrend. The study observes that causality goes from stock return to industrialgrowth, although the extent of causality is very low, but not the other wayround. This finding has significant policy implications particularly in thecontext of financial sector reforms in India. Inflation has negative impact onstock returns, while the innovations in stock returns have not transmitted toinflation.
Highlights
The role of the financial system is essential for a country’s economic growth
The primary objective of this study is to find out the causality between stock return and industrial growth
This study examines the relation between return from the financial assets and industrial growth with monthly time series data from India by looking into stochastic seasonality and the behaviour of volatility clustering of the variables
Summary
This articulation was developed long years back by (Bagehot, 1873) who argued the role of finance in facilitating industrial revolution of Great Britain Later on, this argument has been extended further by (Hicks, 1969; Goldsmith, 1969; Levine, 1991) and many other scholars by considering different dimensions of finance including a variety of financial instruments like bank credit, demand deposits, stocks, bonds and derivative securities. This argument has been extended further by (Hicks, 1969; Goldsmith, 1969; Levine, 1991) and many other scholars by considering different dimensions of finance including a variety of financial instruments like bank credit, demand deposits, stocks, bonds and derivative securities In another views, (Robinson, 1952) and (Lucas Jr, 1988) among others asserted that a country’s financial system automatically responds to demand for particular types of financial arrangements induced by economic growth. The link between financial development and real sector performance is not unambiguous in the literature
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