Relationship among macroeconomic factors and stock prices: cointegration approach from the Indian stock market

Figures & data

Table 1. Details of data sources of variables under study.

Variable name	Definition	Data sources	Period (monthly data)
Dependent variable
NIFTY stock returns	The list is weighted by market capitalization and comprises the top 50 stocks that are most actively traded on the national stock exchange.	NSE website	Monthly data from April 2009 to March 2019
Independent variables
Economic growth (GDP)	Economic growth refers to the increase in the production of goods and services in an economy over time.	Website of the World Bank	Monthly data from April 2009 to March 2019
Inflation (CPI)	The consumer price index (CPI) is the inflation rate that is most commonly acknowledged. With a high score, the index range from 0 to 100 implies elevated inflation.	Website of the RBI	Monthly data from April 2009 to March 2019
Interest rate (IR)	The money market rate serves as a proxy for interest rates and is represented by the monthly average of daily interbank lending rates (%).	Prowess database	Monthly data from April 2009 to March 2019
ER	The exchange rate used in this context is the Indian rupee’s value against the US dollar.	Prowess database	Monthly data from April 2009 to March 2019
Government policies (GP)	Government policies refer to the rules and regulations established by the government to control or stimulate the economic indicators of a country. One of these policies includes tax rate policies, which are considered as a part of government policies.	Website of the Income Tax Department of India	Monthly data from April 2009 to March 2019
Disposable income (DI)	Disposable income is the amount of money that a person or household has left over after paying taxes and essential expenses, such as rent, mortgage, bills, and other necessary living costs. This money is available for spending or saving.	Prowess database	Monthly data from April 2009 to March 2019
Foreign institutional investor (FII)	FII stands for Foreign Institutional Investor, which refers to an individual or organization that invests money in the financial markets of a country other than their own. FIIs typically invest in stocks, bonds, and other securities in the country’s market where they wish to gain exposure.	Website of NSE	Monthly data from April 2009 to March 2019

All values were converted into log values to make the regression relation more linear.

Table 2. Summary of unit root test.

Variables	t-Statistics	ADF at level	t-Statistics	ADF at 1st difference
FII	−3.50	0.12	−11.48	0.00
Disposable income	0.96	0.99	−12.17	0.00
Economic growth (GDP)	−2.36	0.15	−10.77	0.00
Interest rate	−1.58	0.48	−10.78	0.00
Government policies	−0.21	0.93	−10.94	0.00
ER	−0.19	0.93	−8.37	0.00
Inflation rate	−3.49	0.11	−13.29	0.00
Stock prices	−1.15	0.69	−11.13	0.00

Table 3. Result of multicollinearity test.

Variable	VIF
Disposable_income	1.22
ER	1.54
FII	2.08
Interest rates	1.77
Economic growth	1.06
Govt policies	1.71
Inflation	1.68

Table 4. Residuals tests.

Null hypotheses	Test	p-Value	Result
No serial correlation exists	Serial correlation	0.13	Not significant
Residuals are distributed normally	Normality test: Jarque-Bera	2.83 0.92	Not significant
There is no heteroskedasticity in case of NIFTY	Heteroskedasticity	0.78	Not significant
The model does not have any neglected nonlinearities	Stability tests: Ramsey reset test	0.53	Not significant

Figure 1. CUSUM test (NIFTY).

Figure 2. CUSUM of a square (NIFTY).

Table 5. Co-integration estimate (NIFTY).

Trace test					Maximum eigen value test
Null hypothesis	Alternative hypothesis	T statistics	95% Critical value	Sig value	Null hypothesis	Alternative hypothesis	Maximum eigen value statistics	95% Critical value	Sig value
r = 0	r ≥ 1	184.89	159.52	0.00	r = 0	r ≥ 1	55.18	52.36	0.02
r = 1	r ≥ 2	129.70	125.61	0.02	r = 1	r ≥ 2	52.98	46.23	0.00
r = 2	r ≥ 3	76.71	95.753	0.48	r = 2	r ≥ 3	22.48	40.07	0.89
r = 3	r ≥ 4	54.23	69.81	0.45	r = 3	r ≥ 4	19.89	33.87	0.76
r = 4	r ≥ 5	34.34	47.85	0.48	r = 4	r ≥ 5	14.01	27.58	0.82
r = 5	r ≥ 6	20.32	29.79	0.40	r = 5	r ≥ 6	11.75	21.13	0.57
r = 6	r ≥ 7	8.57	15.49	0.40	r = 6	r ≥ 7	6.33	14.26	0.57
r = 7	r ≥ 8	2.23	3.84	0.13	r = 7	r ≥ 8	2.23	3.84	0.13

Table 6. NIFTY lag length.

Lag	LogL	LR	FPE	AIC	SC	HQ
0	−880.22	NA	0.00	15.86	16.05	15.93
1	−20.22	1581.78	7.19*	1.64*	3.39*	2.35*
2	23.14	73.57	1.06	2.01	5.31	3.35
3	87.86	100.55	1.09	2.00	6.85	3.97
4	150.01	87.67*	1.22	2.03	8.44	4.63
5	212.93	79.77	1.43	2.05	10.01	5.28
6	282.47	78.22	1.62	1.95	11.47	5.81
7	362.41	78.51	1.70	1.67	12.73	6.16
8	439.49	64.69	2.18	1.43	14.05	6.55

* Indicates lag order selected by the criterion.

Table 7. Vector error correction model.

	Coefficient	Std. error	t-Statistic	Prob	Significant/not Significant
ECM (−1)	−1.17	0.12	−9.17	0.00	Significant
NIFTY (−1)	0.19	0.09	2.14	0.03	Significant
Disposable income (−1)	1.12	3.19	3.52	0.00	Significant
FII (−1)	2.34	5.13	4.56	0.00	Significant
Economic growth (GDP) (−1)	0.02	0.01	2.65	0.01	Significant
Government policies (−1)	−0.03	0.01	−2.48	0.01	Significant
Interest rates (−1)	−0.03	0.01	−2.06	0.04	Significant
ERs (−1)	−1.10	0.28	−3.91	0.00	Significant
Inflation (−1)	−0.01	0.01	−2.43	0.01	Significant
C	−0.01	0.01	−1.22	0.22	Not Significant

NIFTY Prices = −1.17 + 1.12DI + 2.34FII + 0.02GDP − 0.03GP − 0.03IR − 1.10ER − 0.01INF − 0.01.

Table 8. VEC Granger causality.

Dependent variable: NIFTY
Variables	Chi-sq	df	Prob	Granger causality or not
Disposable income	12.46	1	0.0004	Yes
Exchange rate	15.31	1	0.0001	Yes
FII	20.78	1	0.0000	Yes
Interest rate	4.25	1	0.0391	Yes
Economic growth (GDP)	6.95	1	0.0084	Yes
Government policies	6.21	1	0.0127	Yes
Inflation	6.18	1	0.0129	Yes
All	46.03	7	0.0000	Yes

Table 9. Variance decomposition (VDC) analysis (NIFTY).

Variance decomposition of NIFTY
Period	S.E	NIFTY	Disposable income	ER	GDP	Govt policies	Inflation	Interest rate	FII
1	0.06	100.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
2	0.09	93.62	1.21	0.21	3.56	0.44	0.49	0.36	0.07
3	0.12	90.99	1.11	0.44	4.50	0.50	1.54	0.39	0.49
4	0.15	88.66	1.15	0.55	5.41	0.63	2.32	0.38	0.87
5	0.17	87.11	1.13	0.62	5.91	0.68	2.95	0.35	1.21
6	0.20	85.98	1.12	0.67	6.26	0.73	3.40	0.33	1.48
7	0.22	85.16	1.11	0.70	6.50	0.76	3.74	0.31	1.68
8	0.23	84.54	1.11	0.72	6.68	0.78	3.99	0.30	1.84
9	0.25	84.07	1.10	0.73	6.82	0.79	4.19	0.29	1.97
10	0.26	83.70	1.10	0.75	6.92	0.80	4.34	0.28	2.06