Vol. 2, Issue 5 (2015)
Correlation and causality between stock market and economy: evidence from India
Author(s): Sanjay Joshi
Abstract: Economic theory suggests that stock prices should reflect expectations about future corporate performance, and corporate profits generally reflect the level of economic activities. If stock prices accurately reflect the underlying fundamentals, then the stock prices should be employed as leading indicators of future economic activities, and not the other way around. Thus the purpose of the present study is to investigate the causal relationship persisting in India between macroeconomic variables, namely Wholesale Price Index (WPI), Exchange Rate (USD/INR), Index of Industrial Production (IIP), Foreign Institutional Investments (FIIs), M3 (Broad Money), Gold Prices, Crude Oil Prices and Stock prices of Bombay Stock Exchange (SENSEX) using monthly data after financial crisis from 2008-09 to 2013-14. Specifically, causality test has been used to measure the causal relationship between macroeconomic variables and stock prices using E-VIEWS software. Before testing causality, the study tested for VAR which gave lag structure and ADF Unit Root Test also performed to check the stationarity of data. The research will helpful to economic policy maker of the country and investor to predict the share prices of index.