Co-integration analysis between international macroeconomic factors and S&P sensex movements

Abstract

The Indian stock market is fizzy and energetic; it has been going through many economic reforms since liberalization Indian economy (LPG) 1991 to till date. The Indian economy follows free market economic system, which enhance the scope of investing into stock market. Hence it prevailing significance of international macroeconomic factor on Indian Sensex movements, the present paper has investigate the long term relation and short term dynamics between international macro economic factors Capital account to Gross Domestic Production ratio (CAPGDPR), Crude oil Return (CRUDEOILR), Foreign Direct Investment return (FDIR), Foreign Institution Investment return (FIIR), Foreign Exchange Reserves growth rate (FOREXRESR) Gold return (GOLDR) Net Current account growth rate i.e (Exports divided by Imports) (NCAR) US Dollar Exchange rate to Indian Rupee returns (USDEXR) to Sensex return (SENSEXR) . The Sensex returns and International macroeconomic factors long term and short term analyzed through time series econometric tools Augmented Dickey Fuller (ADF) test check the stationarity, Johansen co integration for investigate long term relationship, Error correction Model for identify the short term dynamics. It is found that the long term co integration exists between these select international macroeconomic variables. Whereas USDEXR and FOREXRESR leads Sensex R and Sensex R corrects faster towards long run equilibrium. On the other hand CAPGDPR, CRUDEOILR, FDIR, FIIR, GOLDR, NCAR coefficients found the weak form of co movement to adjust for long run equilibrium.