Macroeconomic Fundamentals as Determinants of Equity Prices: An Empirical Analysis for India

Pushpa Trivedi and Samir Ranjan Behera

The IUP Journal of Applied Finance, 2012, vol. 18, issue 3, 5-30

Abstract: This study is an attempt to examine the interlinkages between equity prices of Bombay Stock Exchange Sensex (BSE Sensex) and select macroeconomic variables in India in a time series framework. In the first stage of the empirical investigation, the study tries to investigate both the long-run and short-run relationship of equity price (BSE Sensex) with macroeconomic variables, viz., Index of Industrial Production (IIP), Wholesale Price Index (WPI), interest rates (3-month T-bill rate), money supply (M3), Foreign Institutional Investments (FIIs) as well as Morgan Stanley Capital International (MSCI) world index in a cointegration and vector error-correction framework. In the next stage of the empirical investigation, the study explores the dynamic interrelationship of equity prices (BSE Sensex) with different macroeconomic indicators in a cointegrated Vector Autoregressive (VAR) framework by analyzing the impulse response functions and variance decomposition results.

Date: 2012
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