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 language | English |
|---|---|
| Pages (from-to) | 144-160 |
| Number of pages | 17 |
| Journal | International Research Journal of Finance and Economics |
| Volume | 73 |
| Publication status | Published - Aug 2011 |
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Keywords
- Causality test
- Economic growth
- Short-run and long-run dynamics
- Stock market performance
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An empirical analysis of stock market performance and economic growth : Evidence from India. / Paramati, Sudharshan Reddy; Gupta, Rakesh.
In: International Research Journal of Finance and Economics, Vol. 73, 08.2011, p. 144-160.Research output: Contribution to journal › Article
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 -