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Stock prices and Macroeconomic indicators: Investigating a correlation in Indian context

Dhruv Rawat, Sujay Patni and Ram Mehta

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Abstract: The objective of this paper is to find the existence of a relationship between stock market prices and the fundamental macroeconomic indicators. We build a Vector Auto Regression (VAR) model comprising of nine major macroeconomic indicators (interest rate, inflation, exchange rate, money supply, gdp, fdi, trade-gdp ratio, oil prices, gold prices) and then try to forecast them for next 5 years. Finally we calculate cross-correlation of these forecasted values with the BSE Sensex closing price for each of those years. We find very high correlation of the closing price with exchange rate and money supply in the Indian economy.

Date: 2021-12, Revised 2022-02
New Economics Papers: this item is included in nep-cwa, nep-fdg and nep-mac
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Handle: RePEc:arx:papers:2112.08071