MACROECONOMIC VARIABLES AND STOCK EXCHANGE RETURNS
MACROECONOMIC VARIABLES AND STOCK EXCHANGE RETURNS

Summary/Abstract: In this study, made an endeavor to find out the dynamic co-relation among Stock Exchange return and Macroeconomic variables i.e. ER (exchange rate), IR (Interest rate), IP (industrial production), M2 (Money Supply)and Inf (Inflation) by applying monthly data from 1st June 2000 to 30th May 2017. The data have been analysed by applying a Granger causality, coupled with a multivariate cointegration Juselius and Johansen which reflected a long-term relationship among the Stock Exchange Return and selected macroeconomic variables. Denial of the null hypothesis at 5% shows that there occurs unidirectional Granger Causality Test (GCT) among the ER and M2 at the 5% level. There is no other variable exist which are unidirectional GCT. t statistic of ECM is less than 1.96 thus indicating that there is no short term disequilibrium exists between ER, IR, IP, M2, Inf and equity market return. The question of modification, therefore does not exist. In case of Variance decomposition analysis the selected macroeconomic variables shocks are not significant cause of volatility for stock returns. The role of macroeconomic variables to the stock exchange returns ranges from 0 to 3 % over different time lags. Correspondingly, the VECM also approve the non-presence of a short-term co-relation between variables. On the other side, the trace test shows the presence of four cointegrating equations and Maximum eigen value also approves the presence of two cointegrating equations at 5%. The result therefore provides facts of a long-term co-relation among macroeconomic variables and stock returns. It merits that macroeconomic variables be measured as a vital factor in determining stock market movements.

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