Stock Returns and Real Economic Activities: Is There a Connection in India?

Abstract

AbstractIn this chapter, the relationship between stock returns and real economic activities has been examined for India. We also bring in the role of interest rates and dividend yields to this relationship to disentangle the effect of primary variables that influenced stock returns. Our study period is from 2010 to 2021. We analyse monthly, quarterly, and annual data pertaining to this period. In the case of monthly data, we observe that stock returns in a month anticipate the changes in the index of industrial production (IIP) in the following month. But in the case of annual data, this does not hold good. Rather, in the case of annual data, changes in interest rates affect stock returns in the same year and stock returns anticipate the changes in dividend yields in the following year. Moreover, better results are obtained when we use industrial production rather than gross production (GDP). However, our results show that stock returns in India do not help us predict real activities in the case of quarterly and annual data. Our analysis further shows that contemporaneous changes in interest rates and future changes in dividend yield are more important sources of movements in stock returns than future changes in production when we focus on annual data. We can therefore conclude that there is no connection between stock returns and real economic activities in India, except when the monthly data are used.KeywordsStock returnsReal economic activityInterest ratesDividend yieldsIndex of industrial productionGDPAnnual dataMonthly dataWeekly data