Open AccessEmpirical Relationship between Macroeconomic Variables and Stock Prices of Indian Banking Sector: A Vector Error Correction Model Approach
Author(s) -
Aastha Khera,
Neelam Dhanda
Publication year - 2020
Publication title -
the review of finance and banking
Language(s) - English
Resource type - Journals
eISSN - 2067-2713
pISSN - 2067-3825
DOI - 10.24818/rfb.20.12.02.06
Subject(s) - cointegration , error correction model , economics , exchange rate , short run , stock market , interest rate , econometrics , proxy (statistics) , monetary economics , stock (firearms) , mechanical engineering , paleontology , horse , biology , engineering , machine learning , computer science
This existing study aims to investigate the relationship between Indian Bankingstock market prices and macroeconomic variables. The proxy for the Indian Banking stockmarket is Nifty Bank while Foreign Reserve, Exchange Rate (Indian vs US Dollar), Interestrate, and CPI are proxies of macroeconomic variables. Johansen Cointegration and VectorError Correction Model (VECM) on monthly data from January 2013 to July 2020 have beenapplied. Considering the results of cointegration, it is found that there is a long-run asso-ciation between the Indian Banking stock market and constituent macroeconomic variables.Next, the employment of VECM is done for inspecting long run and short-run causality.The result reveals long-run equilibrium in Indian commercial bankís stock prices comingfrom macroeconomic variables. This study has considerable imputations that investors candiversify their portfolio according to the ináuencing power of constituent selected macro-economic variables in the short run and the long run. Exchange rate and foreign reservesdrive the banking stock market in the short run whereas CPI and Interest rate do not createany signiÖcant impact.