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The nexus between stock market and economic activity: an empirical analysis for India

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  • Purna Chandra Padhan

Abstract

Purpose - An understanding on the linkages between financial development and economic growth in general and the stock market with economic activity in particular is imperative in emerging economies. The objective of this paper is to find out the causal linkages between stock market and economic activity in India. Design/methodology/approach - The paper applies recently developed Granger non‐causality tests by Toda‐Yamamota, Dolado and Lutkephol (popularly known as the TYDL model) for an empirical exercise. Findings - The notable finding of the paper is that both the stock price (BSE Sensex) and economic activity (IIP) are integrated of order one, i.e. I (1). The Johansen‐Juselius co‐integration tests suggest the existence of one co‐integrating vector. This rules out spurious relations and suggests the presence of at least one direction of causality. The TYDL model suggests that there is bi‐directional causality between stock price and economic activity during the post‐liberalization period, implying that a well‐developed stock market could enhance economic activity and vice‐versa. Research limitations/implications - In the broader framework of financial markets, the presence and role of the stock market is minuscule in the context of India. Despite this, it could play a considerable role in the process of the economic development of the country. However, to analyze the cause and effect relationship between stock market and economic activity, it is essential to analyze the issue in greater detail and depth. The main limitation of the paper is the use of IIP as a proxy for economic activity, which neglects the agricultural sector, being the primary sector in India and also the service sector. This is of course due to the non‐availability of GDP data on a monthly basis. Further, a detailed study on the issue could be highly appreciable from the perspective of policy implications. Originality/value - The findings of the paper have some valuable implications. It could give some insight for policy makers about the possible linkages between stock market and the economy. Coming to empirical parts, this is perhaps the first paper in the context of India to apply the TYDL model to examine the relationship between stock price and economic activity.

Suggested Citation

  • Purna Chandra Padhan, 2007. "The nexus between stock market and economic activity: an empirical analysis for India," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 34(10), pages 741-753, September.
    • Handle: RePEc:eme:ijsepp:v:34:y:2007:i:10:p:741-753
    DOI: 10.1108/03068290710816874
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    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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    Cited by:

    1. Srinivasan Palamalai & Karthigai Prakasam, 2014. "Stock Market Development and Economic Growth in India: An Empirical Analysis," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 3(3), pages 30-46, July.
    2. repec:ire:issued:v:22:n:01:2019:p:85-110 is not listed on IDEAS
    3. Ali Umar Ahmad & Adam Abdullah & Zunaidah Sulong & Ahmad Tijjani Abdullahi, 2015. "The Review of Stock Returns and Macroeconomic Variables," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(5), pages 154-181, May.
    4. P., Srinivasan, 2014. "Stock Market Development and Economic growth in India: An Empirical Analysis," MPRA Paper 55657, University Library of Munich, Germany.
    5. Muhammad Shahbaz & Ijaz Ur Rehman & Talat Afza, 2016. "Macroeconomic determinants of stock market capitalization in an emerging market: fresh evidence from cointegration with unknown structural breaks," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 9(1), pages 75-99, March.
    6. Tiwari, Aviral Kumar & Mutascu, Mihai Ioan & Albulescu, Claudiu Tiberiu & Kyophilavong, Phouphet, 2015. "Frequency domain causality analysis of stock market and economic activity in India," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 224-238.
    7. Ozlem Goktas & Aycan Hepsag, 2011. "Do stock returns lead real economic activity? Evidence from seasonal cointegration analysis," Economics Bulletin, AccessEcon, vol. 31(3), pages 2117-2127.
    8. Esref Savas BASCI & S leyman Serdar KARACA, 2013. "The Determinants of Stock Market Index: VAR Approach to Turkish Stock Market," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 163-171.
    9. Khan, Muhammad Irfan Khan & Meher, Muhammad Ayub Khan Mehar & Syed, Syed Muhammad Kashif, 2013. "Impact of Inflation on Dividend Policy: Synchronization of Capital Gain and Interest Rate," MPRA Paper 51593, University Library of Munich, Germany, revised 04 Nov 2013.
    10. Shahbaz, Muhammad & Ur Rehman, Ijaz & Zainudin, Rozaimah, 2013. "Macroeconomic Determinants of Stock Market Capitalization in Pakistan:Fresh Evidence from Cointegration with unknown Structural breaks," MPRA Paper 52490, University Library of Munich, Germany, revised 24 Dec 2013.
    11. Sulaiman T. Al-Abduljader, 2019. "Interdependence of Securitized Real Estate in Frontier Markets," International Real Estate Review, Global Social Science Institute, vol. 22(1), pages 83-108.
    12. Arash Habibi & Chin Lee, 2019. "Asymmetric Effects of Exchange Rates on Stock Prices in G7 Countries," Capital Markets Review, Malaysian Finance Association, vol. 27(1), pages 19-33.

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