A Causal Linkage between Economic Indicators and Stock Market Returns - Evidence from National Stock Exchange

Abstract

This paper made an attempt to explore the causal relation between economic indicators and stock market returns. The study has taken Gross Domestic Product (GDP) and Inflation as economic indicators and NSE Nifty as the market proxy for the period often years using quarterly data from January 2003 to December 2012. Using the Augmented Dickey-Fuller and Phillip-Perron unit root test, the two variables GDP and Inflation are tested as non stationary at the level but stationary in first difference although, stock return was found to be stationary at level. There is insignificant positive correlation found between GDP and stock returns whereas it is negative between Inflation and stock return. Granger Causality test highlighted bidirectional relationship between stock returns and GDP at 5% significant level. Although, the regression model does not fit properly which signify that the explanatory variables are not good enough to predict the movement of the stock returns.