Artha Vijnana: Journal of The Gokhale Institute of Politics and Economics

T. G. Saji ¹

Affiliations
1 Department of Commerce and Management Studies, Government College, Thrissur 680014, Kerala, IN

Abstract

This paper sheds light on the implications of the changing structure of stock returns for asset management. Using latest stock market data, under Engle Granger (EG) cointegration framework, it finds absence of stock return correlations among industrial sectors in India. The findings provide clear evidence of the diversification over unrelated sectors which yield more efficient portfolios than diversification over firms. Mean-variance analysis of a set of experimental portfolios further confirms the prediction on portfolio choice with multi-sector consideration. The study suggests analysis of the risk return indifference curves of the investors for matching the portfolio performance with investor utilities.

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T. G. Saji ¹, S. Harikumar ²

Affiliations
1 Post-Graduate Department of Commerce and Management Studies, Government College, Thrissur 680014, IN
2 Department of Applied Economics, Cochin University of Science and Technology, Cochin 682022, Kerala, IN

Abstract

This paper explores dynamic relation between macroeconomic variables and stock prices in India under a Vector Auto Regression framework during 2000- 2012 using monthly data. Variance Decompositions and Impulse responses have been employed to determine how long it would take for the effect of variables to work through the system. The study found money supply, interest rate and exchange rate are the prime economic variables which could make significant impact on stock return volatility. Inflation rate and Index of Industrial Production have shown very negligible influence on the stock prices. Variance Decompositions and Impulse Responses found money supply as the strongest factor influencing stock market in the long-run. When the impact of interest rate and exchange rate are found of very short term, the shocks put forth by FIIs do not cause any significant variation in the movement of nifty prices. Highly integrated structure of monetary system and its linkage with financial sector leads to the conclusion that any variable which has a negative effect on cash flows shall be in a negative relationship with the stock prices. So the monetary policy could be viewed as an effectual instrument in the hands of the government to stabilize stock market.

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