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Dynamic Association between Macroeconomic Variables and Stock Return Volatility: Evidence from India
Current Issue
Volume 4, 2016
Issue 4 (August)
Pages: 40-56   |   Vol. 4, No. 4, August 2016   |   Follow on         
Paper in PDF Downloads: 70   Since Jul. 8, 2016 Views: 1219   Since Jul. 8, 2016
Authors
[1]
Sarbapriya Ray, Dept. of Commerce, Vivekananda College, Under University of Calcutta, Kolkata, India.
[2]
Malayendu Saha, Dept. of Commerce, University of Calcutta, Kolkata, India.
Abstract
The nexus between macroeconomic variables and stock return is incessantly being investigated by different researchers over the last few decades all over the academic world. The objective of the present study is to examine the impact of select macroeconomic variables like exchange rate, gross domestic product, gold price, inflation and oil price fluctuations on the stock return volatility in the Bombay Stock Exchange of India. Econometric techniques like unit root test by applying ADF test (testing stationery), Johansen co-integration test (predicting long run relation) and GARCH (1, 1) model have been used to judge volatility clustering and unconditional return distribution. In addition, some statistical tools like descriptive statistics, autocorrelation function test, chow breakpoint test, diagnostic tests and finally impulse response function tests have been performed for conclusive inference. We have found that causality between stock return (SR) and exchange rate(LNEX) is bidirectional , no causality exist between stock return (SR) and GDP growth(LNGDP), stock return (SR) and gold price (LNGLD). There exist unidirectional causality between stock return (SR) and oil price (LNOIL). The findings from GARCH analysis suggest that only exchange rate has a significant negative effect on stock returns. It is observed that depreciation of Indian rupee has caused lower stock returns and vice versa. The effect of one standard deviation shock in exchange rate results in the decline of stock return since beginning to the third segment of the period of study and reverts back to equilibrium during subsequent periods. Oil price and inflation have also negative impact, though not significantly, on stock return volatility. Other macroeconomic variables like GDP growth, gold price are not found noteworthy in explaining stock returns. Chow breakpoint test statistics suggests that there does not have any structural break (change) in the Indian stock market return function before and after 2008:10, though, BSE SENSEX declines sharply after sub prime lending crisis.
Keywords
Stock Return, Volatility, BSE, Macroeconomic Variables, India, GARCH
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