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Co-integration among Stock Prices and Macroeconomic Variables in India–A Banking Sector Perspective


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1 School of Management Studies, Punjabi University, Patiala, Punjab, India
     

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The study attempts to establish the relationship between banking stock prices in India (S&P BSE BANKEX) and macroeconomic variables namely index of inflation, foreign exchange rate, industrial production, interest rate and money supply over the period of 9 years from April 2009 to March 2018. The study applies unit ischolar_main tests and finds all variables to be non-stationary at level but integrated of the first order. It then employs Johansen’s co-integration test in order to estimate the presence and number of co-integrating vectors and vector error correction model (VECM) to identify relationships. While the study finds that macroeconomic variables are co-integrated with banking stocks in India, short-run dynamics to establish equilibrium were absent among them. It is observed that banking stocks relates positively to industrial growth and negatively to money supply. While banking stock prices were positively linked with inflation & foreign exchange rate and negatively linked with interest rates, their relationship was not statistically significant.

Keywords

Stock Prices, Macroeconomic Variables, Unit-Root Tests, Johansen’s Co-integration, VECM.
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  • Co-integration among Stock Prices and Macroeconomic Variables in India–A Banking Sector Perspective

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Authors

Shukrant Jagotra
School of Management Studies, Punjabi University, Patiala, Punjab, India
Harpreet Singh
School of Management Studies, Punjabi University, Patiala, Punjab, India
Amanpreet Singh
School of Management Studies, Punjabi University, Patiala, Punjab, India

Abstract


The study attempts to establish the relationship between banking stock prices in India (S&P BSE BANKEX) and macroeconomic variables namely index of inflation, foreign exchange rate, industrial production, interest rate and money supply over the period of 9 years from April 2009 to March 2018. The study applies unit ischolar_main tests and finds all variables to be non-stationary at level but integrated of the first order. It then employs Johansen’s co-integration test in order to estimate the presence and number of co-integrating vectors and vector error correction model (VECM) to identify relationships. While the study finds that macroeconomic variables are co-integrated with banking stocks in India, short-run dynamics to establish equilibrium were absent among them. It is observed that banking stocks relates positively to industrial growth and negatively to money supply. While banking stock prices were positively linked with inflation & foreign exchange rate and negatively linked with interest rates, their relationship was not statistically significant.

Keywords


Stock Prices, Macroeconomic Variables, Unit-Root Tests, Johansen’s Co-integration, VECM.

References