Stock market and macroeconomic variables: new evidence from India

R. Gopinathan () and S. Raja Sethu Durai ()
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R. Gopinathan: Shri Mata Vaishno Devi University
S. Raja Sethu Durai: University of Hyderabad

Financial Innovation, 2019, vol. 5, issue 1, 1-17

Abstract: Abstract Understanding the relationship between macroeconomic variables and the stock market is important because macroeconomic variables have a systematic effect on stock market returns. This study uses monthly data from India for the period from April 1994 to July 2018 to examine the long-run relationship between the stock market and macroeconomic variables. The empirical findings suggest that standard cointegration tests fail to identify any relationship among these variables. However, a transformation that extracts the actual functional relationship between these variables using the alternating conditional expectations algorithm of (J Am Stat Assoc 80:580–598, 1985) identifies strong evidence of cointegration and indicates nonlinearity in the long-run relationship. Further, the continuous partial wavelet coherency model identifies strong coherency at a lower frequency for the transformed variables, establishing the fact that the long-run relationship between stock prices and macroeconomic variables in India is nonlinear and time-varying. This evidence has far-reaching implications for understanding the dynamic relationships between the stock market and macroeconomic variables.

Keywords: Stock prices; Nonlinear cointegration; Alternating conditional expectations; Continuous wavelet transformation (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (11)

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DOI: 10.1186/s40854-019-0145-1

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