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IMPACT OF MACRO-
ECONOMIC FACTORS ON
SHARE PRICES IN INDIA
Impact of Macro-Economic Factors on Share Prices of India 1 52
CHAPTER FOUR
Therefore, aggregate equity prices are expected to have strong relationship with
argument holds true in the context of emerging markets too. Compared to their
developed counterparts, the emerging markets are smaller in size and relatively
different from those in developed markets and thus the behavior of market
factors in determining stock price returns has been studied largely using single
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Impact of Macro-Economic Factors on Share Prices of India 153
manufacturing sector and those in financial services sector? (C) Is there any
developed in Johansen (1988) and applied in Johansen and Juselius (1990). This
relationships among variables. The first step in this process is to test for
stationarity in the time series of variables being considered for examining long-
run equilibrium relationship. The stationarity test provides the evidence on the
Dickey-Fuller (ADF) test for unit root is used. Once the order of integration is
term relationship between the market index and the macroeconomic variables.
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Impact ofMacro Economic 'Factors on Share Prices of India
- 154
For this purpose there has to be at least one cointegrating relationship among the
variables.
The results of the stationarity test are presented in Table 4.1. The first
column displays the variables included for cointegration analysis; the second
Table 4.1
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Table 4.1
Notes:(a) MacKinnon (1996) Critical values used for testing of unit root
hypothesis. Crital values are -3.48, -2.88 and -2.58 at 1%, 5% and
10% respectively for test with intercept and -4.02, -3.44 and -3.15 at
1%, 5% and 10% respectively for test with trend and intercept.
(b) *, **, *** represents significance at 1%, 5% and 10% respectively.
column reports the ADF test statistic when a constant (intercept) term is only
included in the ADF model as a deterministic regressor while the third column
shows the results when both a constant term (intercept) and a time trend are
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Impact of gtlacro-'Economic Eactors on Snare (Prices of India 156
incorporated in the model. All the index variables are found to be non-stationary
Inflation, International Oil Prices, and FDI are also found to be integrated of
order one, 41). Exchange Rate is I(0) when only constant term is included as
deterministic regressor in ADF model while it is I(1) when constant and trend is
incorporated in ADF model. However, the AIC value is least in constant only
model for ADF test and therefore it is considered that Excahnge Rate is I(0)
non-stationary variables, at least two variables of all the variables included in the
cointegration system have to be 41). The findings of ADF test are consistent with
this requirement. Therefore all the variables are ideal for testing for long-run
for the model examining the cointegration relationship between aggregate stock
for the model examining the cointegration relationship between textile sector
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Impact ofMacro-Economic Factors on Share T./ices of India 157
for the model examining the cointegration relationship between chemical sector
for the model examining the cointegration relationship between telecom sector
for the model examining the cointegration relationship between food and
The results of both trace test and maximum eigenvalue test for
macroeconomic variables and stock price indices are presented in Table 4.2
through Table 4.8. The results for cointegration test are based on lag of 3 as
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Impact of 911acro Economic Factors on Share Prices of India
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Table 4.2
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Impact of Macro Economic Factors on Share Prices of India
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Table 4.3
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Table 4.4
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Table 4.5
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Table 4.6
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Impact of Micro Economic Factors on Share Prices of India
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Table 4.7
Cointegration test results for LCOSPIFB (Food and Beverage Sector Index)
and Macroeconomic Variables
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Impact of (Macro-Economic Factors on Snare Prices of India 164
Table 4.8
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(i) The results of Johansen's Cointegration analysis indicate that there exists
Table 4.9
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Impact ofMacro-Economic Factors on Share Prices of India 166
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Impact of ,icicro-Economic Tactors on Share Trices of India 167
stock prices in India while money supply and inflation are the significant
imports helps in boosting exports thereby increasing cash flows into the
indicator of booming economy thus the demand and thereby price of the
shares increases [Dimitrova (2005)]. The findings are also consistent with
IP'---
Ray (2008). The findings of negative relationship between inflation and
stock prices are consistent with that of Chen, Roll and Ross (1986) and
Mukherjee and Naka (1995). Further money supply is also found to have
negative relationship with manufacturing index given the fact that money
(iii) The share prices in financial services sector are found to have significant
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Impact of Macro-Economic Tactors on Share Trices of India 168
respect to inflation and financial services sector. Boyd, Levine and Smith
Since these market frictions lead to the rationing of credit, credit rationing
sector index and these findings are consistent with that of Mayasami,
insignificant.
and sectoral indices (Table 4.10) indicate that all the sub-sectors of
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Impact of Macro-'Economic 'Factors on Share 'Prices of India 169
macroeconomic variables and the direction of impact is also the same for
stock prices in all the sub-sectors. The real economic activity and
sectoral indices while money supply and inflation are again found to have
sector in India.
(vi) International oil prices are found to have significant negative relationship
only with textile sector and food and beverage sector although the
much less. The findings are consistent with Maghyereh, A. (2004) who
(vii) Share prices in none of the sector are found to have any significant long
variables in emerging Indian stock market. This is true for general index as well
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- 1 70
Table 4.10
Cointegrating Relationship Between Macroceconomic Factors
and Indian Stock Prices
Manufacturing + - - + - +
Sector * **
Textile + - - + - +
Sector * *** * * ***
Chemical + - - + - +
Sector * * *
Telecom + - - + - +
Sector * * * *
F&B + - - + - +
Sector * * * **
Financial + + - - - -
Services *
Sector
Note: *, " and *' represents significance at 1%, 5% and 10% respectively.
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Impact of Wacro-Economic 'Factors on Share dices of India 171
stock markets significantly. Further, the findings reveal that there does not exist
much scope for earning superior returns based on stock selection from specific
because the sectoral share prices are affected largely by same set of factors and in
the same manner. Some sectoral diversification benefits are however available
between manufacturing and financial services sectors given that the share prices
exchange rate and international oil prices and money supply. Likewise, equities
in textile and food and beverage sector may be avoided during rising
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