Assessing the long-run and short-run effect of monetary variables on stock market in the presence of structural breaks: evidence from liberalized India

Animesh Bhattacharjee · Joy Das

15 citations0/0 files storedIIM Ranchi Journal of Management Studies

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

Purpose The present study examines the long-run and short-run effects of monetary factors (money supply, interest rate, inflation and foreign currency exchange rate) on the Indian stock market. Design/methodology/approach The study used sophisticated econometric tools to analyse monthly observations from January 1993 to December 2019. Findings The augmented Dickey–Fuller (ADF) test indicates that the variables involved in the present study are either I(0) or I(1). The Bai–Perron test multiple break point test identifies four breakpoint dates in the Indian stock market index series. The breakpoint dates are incorporated as different dummy variables in the autoregressive distributed lag-error correction model (ARDL-ECM) regression. The F-bounds test reveals that the variables in the study are cointegrated within the time period under consideration. This study’s findings show that the interest rate, which is a proxy for monetary policy instrument, and the foreign currency exchange rate have a negative impact on the Indian stock market. Furthermore, the authors find that structural changes significantly affect the performance of Indian stock market. Practical implications The study's outcomes indicate that economic factors should be taken into account by investors and portfolio managers when formulating long-term investment strategies. The government, through the Reserve Bank of India, should exercise caution in avoiding discretionary actions that could increase interest rates since the flow of funds to the stock market will be disrupted. To reduce risk, investors should keep a close eye on how interest rates and foreign exchange rates are rising. Originality/value The study covers a long period of time, which the majority of previous work did not consider. Furthermore, the study uses different dummy variables in the ARDL model to represent structural breaks (as determined by the Bai–Perron multiple break point test).

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References

2001Bounds testing approaches to the analysis of level relationships 2012An Autoregressive Distributed-Lag Modelling Approach to Cointegration Analysis 1995DYNAMIC RELATIONS BETWEEN MACROECONOMIC VARIABLES AND THE JAPANESE STOCK MARKET: AN APPLICATION OF A VECTOR ERROR CORRECTION MODEL 2007Dynamic analysis between the US stock returns and the macroeconomic variables 1997Macroeconomic variables and stock prices in a small open economy: The case of Singapore 2006Economic variables and stock market returns: evidence from the Athens stock exchange 2002Interest rates, inflation, and stock prices: the case of the Athens Stock Exchange 2017The Impact of Macroeconomic Indicators on Indian Stock Prices: An Empirical Analysis

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