Academic journal article Advances in Management

Macroeconomic Variables on Stock Market Interactions: The Indian Experience

Academic journal article Advances in Management

Macroeconomic Variables on Stock Market Interactions: The Indian Experience

Article excerpt


To examine the effect of macroeconomic variables on the stock price movement in Indian Stock Market, six variables of macro-economy (inflation, exchange rate, Industrial production, Money Supply, Gold price, interest rate) are used as independent variables. Sensex, Nifty and BSE 100 are indicated as dependent variable. The monthly time series data are gathered from RBI handbook over the period of April 2008 to June 2012. Multiple regression analysis is applied in this paper to construct a quantitative model showing the relationship between macroeconomics and stock price. The result of this paper indicates that significant relationship occurred between macroeconomics variables and stock price in India.

Keywords: Bombay Stock Exchange, National Stock Exchange, Arbitrage pricing theory.


The capital market promotes economic growth and prosperity by providing an investment channel that contributes to attract domestic and foreign capital. The aggregate performance of capital market can be easily seen by its indices that represent the movement of stock prices being traded in capital market.

As we know that the economic stability in a country could be measured by macroeconomics variables. Inflation, interest rate and exchange rate are some macroeconomics variables that reflect economic condition in India and the economic condition will affect the industry condition which ultimately will affect the company activity that is why it is said macroeconomic variables are factors that could not be controlled by the companies which might be affecting the volatility of the stock price.

In modern portfolio theory, the Arbitrage Pricing Theory (APT) assumes that the return on asset is a linear function of various macroeconomic factors or theoretical market indices where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The APT states that the realized return on asset is composed of the expected return on that asset at the beginning of a time period and the unexpected realization of krisk factors during that time period plus firm specific risk. The aim of this paper is to analyze the effects of macroeconomic variables on the Indian Stock market in the APT framework.

To have a deeper insight of this financial-economic phenomenon the three broad based and much observed indices of Indian stock market viz: Sensex, Nifty and BSE-100 are being analyzed based on monthly data from April 2008 to June 2012 by six macroeconomic fundamental indicators. The macroeconomic variables used in this study are whole sale price index, foreign exchange rate, industrial production index, money supply, gold price, money market interest rate etc. In the analyses of time series descriptive statistics, Jarque-Bera test, Unit root test, Correlation matrix, Multi linear regression method, Durbin-Watson test and Whites Heterocadasticity test were used.

Review of Literature

Many authors have tried to show reliable associations between macroeconomic variables and stock returns. They identified several key macroeconomic variables which influenced stock market returns based on the Arbitrage Pricing Theory (APT). A brief overview of the studies is presented in this section.

Maysami and Koh9 tested the relationships between the Singapore stock index and selected macroeconomic variables over a seven-year period from 1988 to 1995 and they found that there existed a positive relationship between stock returns and changes in money supply but negative relationships between stock returns with changes in price levels, short- and long-term interest rates and exchange rates. To examine the interdependence between stock markets and fundamental macroeconomic factors in the five South East Asian countries (Indonesia, Malaysia, Philippines, Singapore and Thailand) was the main purpose of Wongbangpo and Sharma13.

Monthly data from 1985 to 1996 is used in this study to represent GNP, the consumer price index, the money supply, the interest rate and the exchange rate for the five countries. …

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