An empirical analysis of stock market performance and economic growth

Evidence from India

    Research output: Contribution to journalArticle

    13 Citations (Scopus)

    Abstract

    This study aims to investigate whether the stock market performance leads to economic growth or vice versa; study also examines short-run and long-run dynamics of the stock market. We use of monthly Index of Industrial Production (IIP) and quarterly Gross Domestic Production (GDP) data for the time span of April, 1996 to March, 2009. This provides rich data for the empirical analysis. We undertake; Unit root (ADF, PP and KPSS) tests, Granger Causality test, Engle-Granger Cointegration test and Error Correction Model. The monthly results of Granger causality test suggest that there is a bidirectional relationship between IIP and Stock prices (BSE and NSE) and quarterly results reveal that there is no relationship between GDP and BSE but in the case of NSE and GDP there is a unidirectional relationship and that runs from GDP to NSE. The Engle-Granger residual based cointegration test suggests that there is a long-run relationship between the stock market performance and economic growth. Similarly, the results of error correction model reveal that when the long-run equilibrium deviates then the economic growth adjusts to restore equilibrium by rectifying the disequilibrium. This study provides evidence in favor of 'demand following' hypothesis in the short-run. Main contribution of the study is in identifying the role of economic growth in stock market development.

    Original languageEnglish
    Pages (from-to)144-160
    Number of pages17
    JournalInternational Research Journal of Finance and Economics
    Volume73
    Publication statusPublished - Aug 2011

    Fingerprint

    Stock market performance
    Economic growth
    Empirical analysis
    India
    Granger causality test
    Cointegration test
    Error correction model
    Industrial production
    Bovine spongiform encephalopathy
    Short-run
    Unit root
    KPSS test
    Stock market
    Long-run equilibrium
    Long-run relationship
    Stock market development
    Disequilibrium
    Stock prices

    Keywords

    • Causality test
    • Economic growth
    • Short-run and long-run dynamics
    • Stock market performance

    Cite this

    @article{bcf56af4c9c7442fbcdf8c7808991aba,
    title = "An empirical analysis of stock market performance and economic growth: Evidence from India",
    abstract = "This study aims to investigate whether the stock market performance leads to economic growth or vice versa; study also examines short-run and long-run dynamics of the stock market. We use of monthly Index of Industrial Production (IIP) and quarterly Gross Domestic Production (GDP) data for the time span of April, 1996 to March, 2009. This provides rich data for the empirical analysis. We undertake; Unit root (ADF, PP and KPSS) tests, Granger Causality test, Engle-Granger Cointegration test and Error Correction Model. The monthly results of Granger causality test suggest that there is a bidirectional relationship between IIP and Stock prices (BSE and NSE) and quarterly results reveal that there is no relationship between GDP and BSE but in the case of NSE and GDP there is a unidirectional relationship and that runs from GDP to NSE. The Engle-Granger residual based cointegration test suggests that there is a long-run relationship between the stock market performance and economic growth. Similarly, the results of error correction model reveal that when the long-run equilibrium deviates then the economic growth adjusts to restore equilibrium by rectifying the disequilibrium. This study provides evidence in favor of 'demand following' hypothesis in the short-run. Main contribution of the study is in identifying the role of economic growth in stock market development.",
    keywords = "Causality test, Economic growth, Short-run and long-run dynamics, Stock market performance",
    author = "Paramati, {Sudharshan Reddy} and Rakesh Gupta",
    year = "2011",
    month = "8",
    language = "English",
    volume = "73",
    pages = "144--160",
    journal = "International Research Journal of Finance and Economics",
    issn = "1450-2887",
    publisher = "EuroJournals, Inc",

    }

    TY - JOUR

    T1 - An empirical analysis of stock market performance and economic growth

    T2 - Evidence from India

    AU - Paramati, Sudharshan Reddy

    AU - Gupta, Rakesh

    PY - 2011/8

    Y1 - 2011/8

    N2 - This study aims to investigate whether the stock market performance leads to economic growth or vice versa; study also examines short-run and long-run dynamics of the stock market. We use of monthly Index of Industrial Production (IIP) and quarterly Gross Domestic Production (GDP) data for the time span of April, 1996 to March, 2009. This provides rich data for the empirical analysis. We undertake; Unit root (ADF, PP and KPSS) tests, Granger Causality test, Engle-Granger Cointegration test and Error Correction Model. The monthly results of Granger causality test suggest that there is a bidirectional relationship between IIP and Stock prices (BSE and NSE) and quarterly results reveal that there is no relationship between GDP and BSE but in the case of NSE and GDP there is a unidirectional relationship and that runs from GDP to NSE. The Engle-Granger residual based cointegration test suggests that there is a long-run relationship between the stock market performance and economic growth. Similarly, the results of error correction model reveal that when the long-run equilibrium deviates then the economic growth adjusts to restore equilibrium by rectifying the disequilibrium. This study provides evidence in favor of 'demand following' hypothesis in the short-run. Main contribution of the study is in identifying the role of economic growth in stock market development.

    AB - This study aims to investigate whether the stock market performance leads to economic growth or vice versa; study also examines short-run and long-run dynamics of the stock market. We use of monthly Index of Industrial Production (IIP) and quarterly Gross Domestic Production (GDP) data for the time span of April, 1996 to March, 2009. This provides rich data for the empirical analysis. We undertake; Unit root (ADF, PP and KPSS) tests, Granger Causality test, Engle-Granger Cointegration test and Error Correction Model. The monthly results of Granger causality test suggest that there is a bidirectional relationship between IIP and Stock prices (BSE and NSE) and quarterly results reveal that there is no relationship between GDP and BSE but in the case of NSE and GDP there is a unidirectional relationship and that runs from GDP to NSE. The Engle-Granger residual based cointegration test suggests that there is a long-run relationship between the stock market performance and economic growth. Similarly, the results of error correction model reveal that when the long-run equilibrium deviates then the economic growth adjusts to restore equilibrium by rectifying the disequilibrium. This study provides evidence in favor of 'demand following' hypothesis in the short-run. Main contribution of the study is in identifying the role of economic growth in stock market development.

    KW - Causality test

    KW - Economic growth

    KW - Short-run and long-run dynamics

    KW - Stock market performance

    UR - http://www.internationalresearchjournaloffinanceandeconomics.com/

    UR - http://www.scopus.com/inward/record.url?scp=80053076823&partnerID=8YFLogxK

    M3 - Article

    VL - 73

    SP - 144

    EP - 160

    JO - International Research Journal of Finance and Economics

    JF - International Research Journal of Finance and Economics

    SN - 1450-2887

    ER -