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Nexus Between Indian Financial Markets and Macro-economic Shocks: A VAR Approach

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  • Prabhas Kumar Rath

    (Securities and Exchange Board of India)

Abstract

This paper studies the nexus between asset returns volatility in six major segments of Indian financial markets (viz. money, equity, gsec, forex, equity and banking stocks) and macro-economic shocks (viz. GDP, Inflation, Current Account Deficit, market capitalisation to GDP ratio, US Treasury Yield and Foreign Portfolio Investment). The period of study is from April 2002 to March 2021, a period covering four instances of significant economic and financial market stress. Findings of the study are generally aligned to economic theory, except for the case of gsec market. Besides, macro-variables were found to be exerting greater impact when they are in their weaker/unstable state and the behaviour of US treasury yield and FPI flows were found be more significant factors during stress periods and recovery immediately thereafter. Therefore, there is a need to focus on maintaining macroeconomic stability as a policy to foster financial market stability. Besides, there is a need to monitor a customized and dynamic list of macroeconomic variables in respect of each of the financial market segments to decide on the timing, type and quantum of policy and regulatory responses from time to time. This study contributed towards financial markets public policy, particularly during periods of uncertainties.

Suggested Citation

  • Prabhas Kumar Rath, 2023. "Nexus Between Indian Financial Markets and Macro-economic Shocks: A VAR Approach," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(1), pages 131-164, March.
    • Handle: RePEc:kap:apfinm:v:30:y:2023:i:1:d:10.1007_s10690-022-09372-w
    DOI: 10.1007/s10690-022-09372-w
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    1. Subhash Karmakar & Gautam Bandyopadhyay & Jayanta Nath Mukhopadhyay, 2024. "Systemic Risk in Indian Financial Institutions: A Probabilistic Approach," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(3), pages 579-656, September.
    2. Jaheera Thasleema Abdul Lathief & Sunitha Chelliah Kumaravel & Regina Velnadar & Ravi Varma Vijayan & Satyanarayana Parayitam, 2024. "Quantifying Risk in Investment Decision-Making," JRFM, MDPI, vol. 17(2), pages 1-20, February.

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