A Study on Impact of macroeconomic variables in the stock market

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1 A Study n Impact f macrecnmic variables in the stck market Prf. M. Subramanian, Research Schlar PRIST University, Thanjavur CUM Assciate Prfessr, Agni Schl f Business Excellence, Dindigul Abstract Stck market is influenced by macrecnmic variable factrs. There are lt f empirical studies n the macr-ecnmic variable factrs, and hw d they impact n the stck market f any ecnmy. These crss-impacts create ripples in stck market, and thereby investr cnfidence levels are being tested, every nw and then. A healthy and flurishing stck market has been cnsidered relevant fr natinal ecnmic grwth by channelizing capital tward investrs and entrepreneurs. An ecnmy is said t be efficient if it has a gd banking and gd stck market exhibiting upward trend. Earlier a cuntry was cnsidered strng and efficient if it exhibited a sustained grwth f GDP (grss dmestic prduct) and per capita incme. Keywrds: Macr-Ecnmics, Stck Market, GDP, Investr, Ecnmic Grwth tward investrs and entrepreneurs. An ecnmy is said t be efficient if it has a gd banking and gd stck market exhibiting upward trend. Earlier a cuntry was cnsidered strng and efficient if it exhibited a sustained grwth f GDP (grss dmestic prduct) and per capita incme. But, f late it has been recgnised that stck market exerts greater influence n natinal ecnmy. Market capitalisatin, savings, investment, cnsumptin and sund banking and insurance system are cnsidered t be a few imprtant indicatrs f ecnmic grwth. The perfrmance f stck market is ne f them. The relatin between stck returns and ther macr ecnmic variables has been investigated by several researchers ver many years. Equities have always tradinally been regarded as a gd hedge against inflatin because equities are claim against physical assets whse real returns shuld remain unaffected by inflatin. Intrductin Stck market plays a vital rle in any cuntry s ecnmic grwth and develpment. A healthy and flurishing stck market has been cnsidered relevant fr natinal ecnmic grwth by channelizing capital Nw let us have a lk at the cnceptual framewrk f this research paper: Nw in this research paper we are investigating the fllwing variables: Stck market index (Sensex), GDP, Inflatin, CRR, Index n industrial prductin, and USD (US dllars, frex). Cnceptual Framewrk Dependent Variable Stck Market Index BSE Index (SENSEX) Intervening Variables Gvt. Ecnmic Plicies Capital Flws Firm-level Perfrmance Independent Variable Macrecnmic Variables Interest Rate Inflatin Rate Exchange Rate Real GDP Grwth Industrial Prductin ISSN: Page 25

2 Stck Market and Ecnmic Grwth The Wealth Effect The Expectatins Hypthesis Operatinal Definitins f Variables Variables Operatinal Definitins Identity Stck Market Index Ecnmic Grwth Mney Supply Inflatin Rate The stck market index has been used as a measure f aggregate stck prices. The BSE index will be used in lgarithmic frm. The quarterly real GDP grwth rate published by RBI. The lgarithmic frm f quarterly mney supply (M3) data f RBI. The lgarithmic frm f Whlesale Price Index published by NRB Dependent Variable Independent Variable Independent Variable Independent Variable Interest Rate One year T-bills rate f RBI r CRR rate Independent Variable Industrial Prductin The lgarithmic frm f quarterly Index f Industrial Prductin data by the RBI Independent Variable Exchange Rate The real exchange rate between the INR and USD Independent Variable ISSN: Page 26

3 Research design H1: GDP has significant relatinship with the sensex H2: Index n Industrial Prductin and sensex has a significant relatinship. H3: Interest rate (CRR) has significant negative relatinship with the sensex H4: Inflatin (WPI) has significant relatinship with the sensex H5: Frex (US dllar) has significant relatinship with sensex Nte: Sensex here refers stck market, as a whle Data Cllectin Plan Secndary Data Stck Price Data: BSE Database Macrecnmic Variables: RBI Database and CMIE Database / Quarterly Time Series Data (25 t 212) (Nte: Authr s research perid, is taken fr study) Data Analysis - Indian Macr ecnmic variables (Quarterly data since December 25 till June 212) Qrtr # Sensex CRR IIP GDP USD Rate WPI Data Surce: CMIE database (Business Beackn) ISSN: Page 27

4 Statistical Data Analysis (Using Minitab) Crrelatins: Sensex, GDP Pearsn crrelatin f Sensex and GDP =.646 P-Value =. Crrelatins: Sensex, CRR Pearsn crrelatin f Sensex and CRR =.315 P-Value =.11 Crrelatins: Sensex, IIP Pearsn crrelatin f Sensex and IIP =.747 P-Value =. Crrelatins: Sensex, USD Rate Pearsn crrelatin f Sensex and USD Rate = P-Value =.418 Crrelatins: Sensex, WPI Pearsn crrelatin f Sensex and WPI =.636 P-Value =. Regressin Analysis: Sensex versus CRR, IIP, GDP, WPI, USD Rate Sensex = CRR IIP -.31 GDP WPI USD Rate Mdel I SENSEX = c + b1crr + b2 IIP + b3 GDP + b4 EXRATE + b5 WPI Variable Cefficient Std. Errr t-statistic Prb. C CRR IIP GDP EXRATE WPI R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. f regressin Akaike inf criterin Sum squared resid Schwarz criterin Lg likelihd F-statistic Durbin-Watsn stat Prb(F-statistic).1 ISSN: Page 28

5 Analysis f Variance Surce DF SS MS F P Regressin Residual Errr Ttal Surce DF Seq SS CRR IIP GDP WPI USD Rate Unusual Observatins ObsCRR Sensex Fit SE Fit Residual St Resid R Mdel II (Lg-Lg Mdel) Variable Cefficient Std. Errr t-statistic Prb. C LOG(CRR) **.99 LOG(IIP) LOG(GDP) LOG(EXRATE) *.4 LOG(WPI) *.1 R-squared Mean dependent var Adjusted R-squared.7592 S.D. dependent var S.E. f regressin Akaike inf criterin Sum squared resid Schwarz criterin Lg likelihd F-statistic Durbin-Watsn stat Prb(F-statistic).1 ISSN: Page 29

6 Frequency Residual Percent Residual SSRG Internatinal Jurnal f Ecnmics and Management Studies (SSRG-IJEMS) vlume2 issue5 Sep t Oct Nrmal Prbability Plt Residual Plts fr Sensex 4 Versus Fits Residual Fitted Value 2 Histgram Versus Order Residual Observatin Order Actual, Fitted and Residual Residual Actual Fitted ISSN: Page 3

7 Nrmality f Residual Series: Residuals Sample Observatins 27 Mean 2.92E-15 Median Maximum Minimum Std. Dev Skewness Kurtsis Jarque-Bera Prbability Residuals ISSN: Page 31

8 Nrmal Plt Hmeskedasticity f Errrs ISSN: Page 32

9 Summary f Findings, Analysis and Cnclusins Bibligraphy / References The data analysis clearly shws that the macr ecnmic variables are influencing the stck market index (sensex) frm the abve calculatins. Fr instance, r squared is.8 and.79, P-value is als ideal in the abve calculatins. These are the indicatins that thereby the macr ecnmic variables are influencing the sensex. The entire hypthesis are being tested and demystified thrugh the abve analysis. Atje, R. and Jvanvic, B. (1993), Stck markets and Develpment, Eurpean Ecnmic Review, Vl. 37, pp Brwn, S.J. and Otsuki, T. (199), Macrecnmic factrs and the Japanese equity markets: the CAPMD prject, in Eltn, E.J. and Gruber, M.J. (Eds), Japanese Capitals Markets, Harper & Rw, New Yrk, NY. Chen, N., Rll, R. and Rss, S. (1986), Ecnmic frces and the stck market, Jurnal f Business, Vl. 59 N. 3, pp Maghayereh, A. (23), Causal relatins amng stck prices and Macrecnmic variables in the small, pen ecnmy f Jrdan, JKAU: Ecn. & Adm., Vl. 17 N. 2, pp Levine, R. and Zervs, S. (1996a), Stck market Develpment and lng-run grwth, The Wrld Bank Ecnmic Review, Vl. 1 N. 2, pp Pn, S. and Taylr, S.J. (1991), Macrecnmic factrs and the UK stck market, Jurnal f Business Finance & Accunting, Vl. 18 N. 5, pp ISSN: Page 33