This paper comprehensively examines the long run relationship between aggregate stock prices and ... more This paper comprehensively examines the long run relationship between aggregate stock prices and select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate, Money Supply and International Oil Prices) in the emerging BRICS markets over the period 1995 to 2014 using quarterly data. To assess the impact of global financial crisis on this relationship, we consider two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Long Run Granger Causality Test, Johansen’s Cointegration Test (both Bivariate & Multivariate) and Vector Error Correction Mechanism (VECM) are applied. Overall, we find that there is unidirectional long run causality from Stock prices to GDP, Inflation & Interest Rate. A bidirectional long run causal relationship of Stock prices is found with Money Supply and Oil Prices. Also, the long run granger causal relationship differs significantly between pre and post crisis periods for all the macroeconomic variables. Johansen’s Cointegration results suggest presence of long run equilibrium relationship between BRICS Stock prices and select Macroeconomic Factors (except Inflation and Oil Prices). There was no major difference in cointegration results in pre and post crisis periods except for Inflation and Interest rate, implying that global financial crisis has led to greater long run integration of stock market with the real economy. VECM results indicate that error correction to restore equilibrium is more in stock market than in macroeconomic factors. Thus, in times of any destabilisation or disequilibrium in long run the real economy leads the stock market to a new equilibrium. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, academicians, researchers and investment community particularly in emerging markets.
With its unconventional and unprecedented growth on a sustained basis, the contribution of Servic... more With its unconventional and unprecedented growth on a sustained basis, the contribution of Service sector to India’s economy in terms of GDP, income & employment generation, international trade and investment flows, improvement in per capita income and standards of living of general Indians has been both tremendous and amazing. In this light, the behaviour of Service Sector in Indian Stock market is also gaining attention. In a one of its kind study, this paper undertakes a comprehensive examination of Indian Service Sector Stocks from various dimensions, viz., Weak Form Efficiency, Determinants and Performance. We study service sector through nine sectoral indices of BSE (Bank, Energy, Finance, Health Care, IT, Power, Realty, TECK and Telecom) and one broad thematic Service Sector Index of NSE using monthly data from September 2005 to October 2015. We measure their adherence to Random Walk Hypothesis (Weak Form Efficiency) through a battery of Unit Root Tests [Augmented Dickey Fuller (ADF), Phillips–Perron (PP) & Kwiatkowski-Phillips-Schmidt-Shin (KPSS)] and Variance Ratio Tests [Lo-MacKinlay, Wright’s Ranks & Wright’s Signs). We further employ proxies for Stock Market [BSE Sensex for Indian Stock Market & MSCI All Country World Index (MSCI ACWI) for Global Equity Markets] and prominent Macroeconomic Variables [Index of Industrial Production (IIP), Inflation (CPI), Interest Rate, Exchange Rate] as Regressors through Multiple Regression Analysis to find out the major determinants of Indian Service Sector Stock Returns. Finally, we also evaluate the performance of these Service sector Indices through three popular Performance measure ratios, i.e., Sharpe Ratio, Treynor Ratio and Jensen’s Alpha. Overall, the Efficiency tests reveal that all Indian Service Sector Indices are indeed following the Random Walk Hypothesis and are I(1). All the Regression models were highly significant with very high explanatory powers and no problem of multicollinearity or autocorrelation. Across the board, Exchange Rate from amongst the Macroeconomic Variables and Sensex from Stock Market Variables came out to be the significant determinants of Indian Service Sector Stock Returns. Performance evaluation measures indicated that almost half of the service sector indices lead by Healthcare could significantly outperform the broader market on risk adjusted basis. These results are relevant and have pertinent implications for a broad range of stakeholders related to the field including policy makers, regulators, investors, academicians and researchers.
Econometric Modeling: Capital Markets - Asset Pricing eJournal, 2015
Equity investment is assumed to be a good hedge against inflation since long time. This paper exa... more Equity investment is assumed to be a good hedge against inflation since long time. This paper examines short run causal relationship between inflation and stock return in emerging BRICS markets. The study covers a comprehensive period of 13 years from the year 2000 to 2013 using quarterly data. The regression results reveal a significant positive relationship between changes in inflation and stock returns only in case of Brazil. But, Granger causality results reveal unidirectional causality from stock return to changes in inflation in Russia, India and South Africa and bidirectional causality in China. Hence, there seem to be a cause and effect relationship between stock returns and inflation in emerging markets. The results are of pertinent importance in today's context where emerging markets are facing the problems of rising inflation and volatile stock returns. The policy regulators need to understand these dynamics between inflation and stock returns to ensure better regulat...
This paper examines the relationship between various macroeconomic variables and banking stock re... more This paper examines the relationship between various macroeconomic variables and banking stock returns in order to find out significant sources of systematic risks in banking stock returns in India. Monthly data for the period 2002-2014 (further divided into a pre crisis and a post crisis period) has been analysed using unit root test, correlation, regression, Granger causality (both short and long run) and cointegration tests. Results reveal that exchange rate, market factor and long term interest rate are significant in explaining banking stock returns in India in total and post crisis periods (with R Square being 82% and 87% respectively). Short run causality results reveal unidirectional causality from long run interest rate to banking stock returns and from banking stock returns to market returns. On the other hand, long run causality results reveal that inflation and money supply Granger cause bankex while bankex Granger causes IIP and short term interest rate. Hence, there se...
This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, ... more This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate and Money Supply) and aggregate stock returns in emerging markets constituting the BRICS block over the period 1995 to 2014 using quarterly panel data. This relationship is also examined during two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Robust econometric tests like Panel Granger Causality Test, Pedroni’s Panel Cointegration Test and Panel Auto Regressive Distributed Lag (ARDL) Model has been used. We find that primarily in short run there is unidirectional causality running from stock returns to GDP growth rate, inflation rate, rate of change in exchange rate and money supply. The results are almost similar in pre and post crisis periods, except that in the pre crisis period, there is bidirectional causality between stock returns and inflation, while in the post crisis period it disappears. L...
International Journal of Accounting and Financial Reporting, 2015
Stocks are generally considered to be a good hedge against inflation because of their tendency to... more Stocks are generally considered to be a good hedge against inflation because of their tendency to move together. This paper examines long term relationship between inflation and stock returns in BRICS markets using panel data for the period from March 2000 to September 2013. Correlation results reveal a significant negative relationship between stock index and inflation rate for Russia and a significantly positive relationship for India & China. ADF, PP and KPSS unit root tests indicate non-stationary characteristic of the data. Further we find no long term co-integrating relationship between stock index values and inflation rates using Pedroni panel co integration test. These findings have important implications for policy makers, regulators and investment community at large. There may seem to be short term contemporaneous relationship between inflation and equity returns but in the long run they do not seem to be significantly integrated. Changes in inflation may bring some short ...
The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macroeconom... more The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macroeconomic variables (sources of systematic risk) in explaining stock returns. In the same vein, this paper examines the relationship between macroeconomic variables (GDP, inflation, interest rate, exchange rate, money supply, and oil prices) and aggregate stock returns in BRICS markets over the period 1995-2014 using quarterly data. We have applied Auto Regressive Distributed Lag (ARDL) model to document such a relationship for individual countries as well as for panel data.
In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock ... more In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock Market. For this, daily data for 11sectoral indices on NSE viz. Auto, Bank, Energy, Finance, FMCG, IT, Media, Metal, Pharma, PSU Banks, and Realty Index have been used. The study period spans from Jan 2004 to Jan 2014 covering a comprehensive 10 years including the recent global financial crisis. The analysis is done using unit root tests [Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS)]and Variance ratio tests [Chow Denning Joint Test, LoMackinlay Test and Wright (2000) Test based on Ranks and Signs]. The results suggest that although overall Indian stock market seems to be weak form efficient, but different sectors comprising it are not, especially during total study period. Further we find evidence of increased inefficiency in Bank, Metal, PSU Bank and Realty sectors in the post-crisis period. This may be due to investor's overreact...
In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock ... more In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock Market. For this, daily data for 11sectoral indices on NSE viz. Auto, Bank, Energy, Finance, FMCG, IT, Media, Metal, Pharma, PSU Banks, and Realty Index have been used. The study period spans from Jan 2004 to Jan 2014 covering a comprehensive 10 years including the recent global financial crisis. The analysis is done using unit root tests [Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS)]and Variance ratio tests [Chow Denning Joint Test, LoMackinlay Test and Wright (2000) Test based on Ranks and Signs]. The results suggest that although overall Indian stock market seems to be weak form efficient, but different sectors comprising it are not, especially during total study period. Further we find evidence of increased inefficiency in Bank, Metal, PSU Bank and Realty sectors in the post-crisis period. This may be due to investor's overreaction in Indian stock market. Tripathi & Aggarwal (2009) have reported that Indian investors tend to overreact to bad news and hence post crisis,the price discovery mechanism was not so efficient. The findings on sectoral efficiency in India have important implications for policy makers, mutual funds, portfolio managers and investors at large. Weak form inefficiency in Bank, Metal, PSU Bank and Realty sectors is suggestive of exploitable arbitrage opportunities in these sectors. The regulators and policy makers must also note that overall market efficiency may not imply efficiency at the sectoral level; for this, more efforts and sector specific reforms need to be taken. Keyword: Market Efficiency, Sectoral Efficiency, Weak form Market Efficiency, Indian Stock Market, Variance Ratio Test JEL Classification: G12, G14
This paper examines the relationship between various macroeconomic variables and banking stock re... more This paper examines the relationship between various macroeconomic variables and banking stock returns in order to find out significant sources of systematic risks in banking stock returns in India. Monthly data for the period 2002-2014 (further divided into a pre crisis and a post crisis period) has been analysed using unit root test, correlation, regression, Granger causality (both short and long run) and cointegration tests. Results reveal that exchange rate, market factor and long term interest rate are significant in explaining banking stock returns in India in total and post crisis periods 2 (with R being 82% and 87% respectively). Short run causality results reveal unidirectional causality from long run interest rate to banking stock returns and from banking stock returns to market returns. On the other hand, long run causality results reveal that inflation and money supply Granger cause bankex while bankex Granger causes IIP and short term interest rate. Hence, there seem to be a lead lag relationship between banking stock returns and various macroeconomic sources of risks. We found long run cointegration of banking stock returns with money supply and short run interest rate. These results provide support to the argument that besides market risk, interest rate risk and currency risk are also priced in banking stock returns. These findings are pertinent for policy makers, regulators and investors at large.
With its unconventional and unprecedented growth on a sustained basis, the contribution of Servic... more With its unconventional and unprecedented growth on a sustained basis, the contribution of Service sector to India's economy in terms of GDP, income & employment generation, international trade and investment flows, improvement in per capita income and standards of living of general Indians has been both tremendous and amazing. In this light, the behaviour of Service Sector in Indian Stock market is also gaining attention. In a one of its kind study, this paper undertakes a comprehensive examination of Indian Service Sector Stocks from various dimensions, viz., Weak Form Efficiency, Determinants and Performance. We study service sector through nine sectoral indices of BSE (Bank, Energy, Finance, Health Care, IT, Power, Realty, TECK and Telecom) and one broad thematic Service Sector Index of NSE using monthly data from September 2005 to October 2015. We measure their adherence to Random Walk Hypothesis (Weak Form Efficiency) through a battery of Unit Root Tests [Augmented Dickey Fuller (ADF), Phillips–Perron (PP) & Kwiatkowski-Phillips-Schmidt-Shin (KPSS)] and Variance Ratio Tests [Lo-MacKinlay, Wright's Ranks & Wright's Signs). We further employ proxies for Stock Market [BSE Sensex for Indian Stock Market & MSCI All Country World Index (MSCI ACWI) for Global Equity Markets] and prominent Macroeconomic Variables [Index of Industrial Production (IIP), Inflation (CPI), Interest Rate, Exchange Rate] as Regressors through Multiple Regression Analysis to find out the major determinants of Indian Service Sector Stock Returns. Finally, we also evaluate the performance of these Service sector Indices through three popular Performance measure ratios, i.e., Sharpe Ratio, Treynor Ratio and Jensen's Alpha. Overall, the Efficiency tests reveal that all Indian Service Sector Indices are indeed following the Random Walk Hypothesis and are I(1). All the Regression models were highly significant with very high explanatory powers and no problem of multicollinearity or autocorrelation. Across the board, Exchange Rate from amongst the Macroeconomic Variables and Sensex from Stock Market Variables came out to be the significant determinants of Indian Service Sector Stock Returns. Performance evaluation measures indicated that almost half of the service sector indices lead by Healthcare could significantly outperform the broader market on risk adjusted basis. These results are relevant and have pertinent implications for a broad range of stakeholders related to the field including policy makers, regulators, investors, academicians and researchers.
This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, ... more This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate and Money Supply) and aggregate stock returns in emerging markets constituting the BRICS block over the period 1995 to 2014 using quarterly panel data. This relationship is also examined during two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Robust econometric tests like Panel Granger Causality Test, Pedroni's Panel Cointegration Test and Panel Auto Regressive Distributed Lag (ARDL) Model has been used. We find that primarily in short run there is unidirectional causality running from stock returns to GDP growth rate, inflation rate, rate of change in exchange rate and money supply. The results are almost similar in pre and post crisis periods, except that in the pre crisis period, there is bidirectional causality between stock returns and inflation, while in the post crisis period it disappears. Long run panel causality results reveals unidirectional causality from stock returns to GDP growth rate in total and post crisis periods. However in pre crisis period, there was no long run causal relationship. Pedroni's panel cointegration test shows that stock indices are cointegrated with GDP in total period and with GDP, inflation and money supply in post crisis period. Panel ARDL models have explanatory power ranging from 28% in total period to 62% in post crisis period. We find that while current stock returns are negatively linked to rate of change in exchange rate and money supply; they are positively linked to their own lagged values. In pre crisis period, rate of change in money supply significantly explains stock returns while in post crisis period, inflation rate, interest rate and rate of change in exchange rate and money supply negatively affects BRICS panel stock returns. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, researchers and investing community in emerging markets. The regulators need to ensure that financial sector reforms agenda consciously considers interlinkages between stock markets and real economy. The investment community can devise investment strategy, using the results of this study to earn arbitrage profits in emerging stock markets.
This paper comprehensively examines the long run relationship between aggregate stock prices and ... more This paper comprehensively examines the long run relationship between aggregate stock prices and select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate, Money Supply and International Oil Prices) in the emerging BRICS markets over the period 1995 to 2014 using quarterly data. To assess the impact of global financial crisis on this relationship, we consider two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Long Run Granger Causality Test, Johansen’s Cointegration Test (both Bivariate & Multivariate) and Vector Error Correction Mechanism (VECM) are applied. Overall, we find that there is unidirectional long run causality from Stock prices to GDP, Inflation & Interest Rate. A bidirectional long run causal relationship of Stock prices is found with Money Supply and Oil Prices. Also, the long run granger causal relationship differs significantly between pre and post crisis periods for all the macroeconomic variables. Johansen’s Cointegration results suggest presence of long run equilibrium relationship between BRICS Stock prices and select Macroeconomic Factors (except Inflation and Oil Prices). There was no major difference in cointegration results in pre and post crisis periods except for Inflation and Interest rate, implying that global financial crisis has led to greater long run integration of stock market with the real economy. VECM results indicate that error correction to restore equilibrium is more in stock market than in macroeconomic factors. Thus, in times of any destabilisation or disequilibrium in long run the real economy leads the stock market to a new equilibrium. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, academicians, researchers and investment community particularly in emerging markets.
Volatility spillover among major equity markets has long fascinated academicians and researchers ... more Volatility spillover among major equity markets has long fascinated academicians and researchers alike. This paper presents an elaborate survey and analysis of the literature on the subject. Review of extant studies on various basis such as markets studied, methodology employed, among others has important implications for various stakeholders. We report that there has been wide variation in results because different studies have examined different markets using wide range of financial econometric methodologies. Some have considered only volatility or both volatility and spillover. Still others have incorporated the impact of global financial crisis on volatility spillover. Future researchers should examine if there is any volatility spillovers between various sectors of an economy, between different financial markets of the same economy, amongst same sectors of different markets, probe whether size effect is relevant, identify the transmission channels of volatility spillover, enumerate reasons behind volatility spillover, examine asymmetric volatility responses among stock markets and can use more advanced econometric techniques.
The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macroeconom... more The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macroeconomic variables (sources of systematic risk) in explaining stock returns. In the same vein, this paper examines the relationship between macroeconomic variables (GDP, inflation, interest rate, exchange rate, money supply, and oil prices) and aggregate stock returns in BRICS markets over the period 1995-2014 using quarterly data. We have applied Auto Regressive Distributed Lag (ARDL) model to document such a relationship for individual countries as well as for panel data. Contrary to general belief, we find that GDP and inflation are not found to be significantly affecting stock returns in most of BRICS markets mainly because Stock returns generally tend to lead rather than follow GDP and inflation. In line with the theory and literature, we find significant negative impact of interest rate, exchange rate and oil prices on stock returns and a positive impact of money supply. This study would be a valuable addition to the growing body of empirical literature on the subject besides being useful to policy makers, regulators and investment community. Policy makers and regulator should watch out for impact of fluctuations in exchange rate, interest rate, money supply, and oil prices on volatility in their stock markets. Investor can search for arbitrage opportunities in BRICS markets on the basis of these variables but not the basis of GDP or inflation.
Relationship between stock market performance and macroeconomic variables has intrigued and is of... more Relationship between stock market performance and macroeconomic variables has intrigued and is of pertinent importance to policy makers, regulators, academicians, researchers and investment community. This paper presents a comprehensive theoretical framework underpinning this relationship and also provides an extensive critical analysis of existing literature on the subject. Theory suggests that stock market performance has positive relationship with GDP, Money Supply, Industrial Production, Foreign Exchange Reserves, Balance of Trade, Net FPI and FDI Inflows. It is negatively related with Inflation, Interest Rate, Gold Price and Oil Prices. Relationship of stock market with exchange rate and fiscal deficit is not clear. Critical examination of literature on various bases suggests that while this relationship is clearly established for developed markets, there is no unanimity for this relationship regarding emerging markets. Also, while some prominent macroeconomic variables which affect stock market performance can be identified, an exhaustive list of macroeconomic variables cannot be drawn. There has been a shift in econometric methods applied from basic tools to more advanced second generation financial econometric techniques Future researchers should focus on examining this relationship for emerging markets, consider a comprehensive set of macroeconomic and stock market performance variables, take a fairly long study period, apply modern financial econometric techniques, explore this relation at sectoral level and incorporate impact of recent global financial crisis in their study.
Equity investment is assumed to be a good hedge against inflation since long time. This paper exa... more Equity investment is assumed to be a good hedge against inflation since long time. This paper examines short run causal relationship between inflation and stock return in emerging BRICS markets. The study covers a comprehensive period of 13 years from the year 2000 to 2013 using quarterly data. The regression results reveal a significant positive relationship between changes in inflation and stock returns only in case of Brazil. But, Granger causality results reveal unidirectional causality from stock return to changes in inflation in Russia, India and South Africa and bidirectional causality in China. Hence, there seem to be a cause and effect relationship between stock returns and inflation in emerging markets. The results are of pertinent importance in today‟s context where emerging markets are facing the problems of rising inflation and volatile stock returns. The policy regulators need to understand these dynamics between inflation and stock returns to ensure better regulation of the markets. For investors particularly large and institutional investors the study findings support trading based on inflation forecasts. efficiency of Indian stock market.
In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock... more In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock Market. For this, daily data for 11sectoral indices on NSE viz. Auto, Bank, Energy, Finance, FMCG, IT, Media, Metal, Pharma, PSU Banks, and Realty Index have been used. The study period spans from Jan 2004 to Jan 2014 covering a comprehensive 10 years including the recent global financial crisis. The analysis is done using unit root tests [Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS)]and Variance ratio tests [Chow Denning Joint Test, LoMackinlay Test and Wright (2000) Test based on Ranks and Signs]. The results suggest that although overall Indian stock market seems to be weak form efficient, but different sectors comprising it are not, especially during total study period. Further we find evidence of increased inefficiency in Bank, Metal, PSU Bank and Realty sectors in the post-crisis period. This may be due to investor’s overreaction in Indian stock market. Tripathi & Aggarwal (2009) have reported that Indian investors tend to overreact to bad news and hence post-crisis, the price discovery mechanism was not so efficient. The findings on sectoral efficiency in India have important implications for policy makers, mutual funds, portfolio managers and investors at large. Weak form inefficiency in Bank, Metal, PSU Bank and Realty sectors is suggestive of exploitable arbitrage opportunities in these sectors. The regulators and policy makers must also note that overall market efficiency may not imply efficiency at the sectoral level; for this, more efforts and sector specific reforms need to be taken.
This paper comprehensively examines the long run relationship between aggregate stock prices and ... more This paper comprehensively examines the long run relationship between aggregate stock prices and select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate, Money Supply and International Oil Prices) in the emerging BRICS markets over the period 1995 to 2014 using quarterly data. To assess the impact of global financial crisis on this relationship, we consider two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Long Run Granger Causality Test, Johansen’s Cointegration Test (both Bivariate & Multivariate) and Vector Error Correction Mechanism (VECM) are applied. Overall, we find that there is unidirectional long run causality from Stock prices to GDP, Inflation & Interest Rate. A bidirectional long run causal relationship of Stock prices is found with Money Supply and Oil Prices. Also, the long run granger causal relationship differs significantly between pre and post crisis periods for all the macroeconomic variables. Johansen’s Cointegration results suggest presence of long run equilibrium relationship between BRICS Stock prices and select Macroeconomic Factors (except Inflation and Oil Prices). There was no major difference in cointegration results in pre and post crisis periods except for Inflation and Interest rate, implying that global financial crisis has led to greater long run integration of stock market with the real economy. VECM results indicate that error correction to restore equilibrium is more in stock market than in macroeconomic factors. Thus, in times of any destabilisation or disequilibrium in long run the real economy leads the stock market to a new equilibrium. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, academicians, researchers and investment community particularly in emerging markets.
With its unconventional and unprecedented growth on a sustained basis, the contribution of Servic... more With its unconventional and unprecedented growth on a sustained basis, the contribution of Service sector to India’s economy in terms of GDP, income & employment generation, international trade and investment flows, improvement in per capita income and standards of living of general Indians has been both tremendous and amazing. In this light, the behaviour of Service Sector in Indian Stock market is also gaining attention. In a one of its kind study, this paper undertakes a comprehensive examination of Indian Service Sector Stocks from various dimensions, viz., Weak Form Efficiency, Determinants and Performance. We study service sector through nine sectoral indices of BSE (Bank, Energy, Finance, Health Care, IT, Power, Realty, TECK and Telecom) and one broad thematic Service Sector Index of NSE using monthly data from September 2005 to October 2015. We measure their adherence to Random Walk Hypothesis (Weak Form Efficiency) through a battery of Unit Root Tests [Augmented Dickey Fuller (ADF), Phillips–Perron (PP) & Kwiatkowski-Phillips-Schmidt-Shin (KPSS)] and Variance Ratio Tests [Lo-MacKinlay, Wright’s Ranks & Wright’s Signs). We further employ proxies for Stock Market [BSE Sensex for Indian Stock Market & MSCI All Country World Index (MSCI ACWI) for Global Equity Markets] and prominent Macroeconomic Variables [Index of Industrial Production (IIP), Inflation (CPI), Interest Rate, Exchange Rate] as Regressors through Multiple Regression Analysis to find out the major determinants of Indian Service Sector Stock Returns. Finally, we also evaluate the performance of these Service sector Indices through three popular Performance measure ratios, i.e., Sharpe Ratio, Treynor Ratio and Jensen’s Alpha. Overall, the Efficiency tests reveal that all Indian Service Sector Indices are indeed following the Random Walk Hypothesis and are I(1). All the Regression models were highly significant with very high explanatory powers and no problem of multicollinearity or autocorrelation. Across the board, Exchange Rate from amongst the Macroeconomic Variables and Sensex from Stock Market Variables came out to be the significant determinants of Indian Service Sector Stock Returns. Performance evaluation measures indicated that almost half of the service sector indices lead by Healthcare could significantly outperform the broader market on risk adjusted basis. These results are relevant and have pertinent implications for a broad range of stakeholders related to the field including policy makers, regulators, investors, academicians and researchers.
Econometric Modeling: Capital Markets - Asset Pricing eJournal, 2015
Equity investment is assumed to be a good hedge against inflation since long time. This paper exa... more Equity investment is assumed to be a good hedge against inflation since long time. This paper examines short run causal relationship between inflation and stock return in emerging BRICS markets. The study covers a comprehensive period of 13 years from the year 2000 to 2013 using quarterly data. The regression results reveal a significant positive relationship between changes in inflation and stock returns only in case of Brazil. But, Granger causality results reveal unidirectional causality from stock return to changes in inflation in Russia, India and South Africa and bidirectional causality in China. Hence, there seem to be a cause and effect relationship between stock returns and inflation in emerging markets. The results are of pertinent importance in today's context where emerging markets are facing the problems of rising inflation and volatile stock returns. The policy regulators need to understand these dynamics between inflation and stock returns to ensure better regulat...
This paper examines the relationship between various macroeconomic variables and banking stock re... more This paper examines the relationship between various macroeconomic variables and banking stock returns in order to find out significant sources of systematic risks in banking stock returns in India. Monthly data for the period 2002-2014 (further divided into a pre crisis and a post crisis period) has been analysed using unit root test, correlation, regression, Granger causality (both short and long run) and cointegration tests. Results reveal that exchange rate, market factor and long term interest rate are significant in explaining banking stock returns in India in total and post crisis periods (with R Square being 82% and 87% respectively). Short run causality results reveal unidirectional causality from long run interest rate to banking stock returns and from banking stock returns to market returns. On the other hand, long run causality results reveal that inflation and money supply Granger cause bankex while bankex Granger causes IIP and short term interest rate. Hence, there se...
This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, ... more This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate and Money Supply) and aggregate stock returns in emerging markets constituting the BRICS block over the period 1995 to 2014 using quarterly panel data. This relationship is also examined during two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Robust econometric tests like Panel Granger Causality Test, Pedroni’s Panel Cointegration Test and Panel Auto Regressive Distributed Lag (ARDL) Model has been used. We find that primarily in short run there is unidirectional causality running from stock returns to GDP growth rate, inflation rate, rate of change in exchange rate and money supply. The results are almost similar in pre and post crisis periods, except that in the pre crisis period, there is bidirectional causality between stock returns and inflation, while in the post crisis period it disappears. L...
International Journal of Accounting and Financial Reporting, 2015
Stocks are generally considered to be a good hedge against inflation because of their tendency to... more Stocks are generally considered to be a good hedge against inflation because of their tendency to move together. This paper examines long term relationship between inflation and stock returns in BRICS markets using panel data for the period from March 2000 to September 2013. Correlation results reveal a significant negative relationship between stock index and inflation rate for Russia and a significantly positive relationship for India & China. ADF, PP and KPSS unit root tests indicate non-stationary characteristic of the data. Further we find no long term co-integrating relationship between stock index values and inflation rates using Pedroni panel co integration test. These findings have important implications for policy makers, regulators and investment community at large. There may seem to be short term contemporaneous relationship between inflation and equity returns but in the long run they do not seem to be significantly integrated. Changes in inflation may bring some short ...
The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macroeconom... more The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macroeconomic variables (sources of systematic risk) in explaining stock returns. In the same vein, this paper examines the relationship between macroeconomic variables (GDP, inflation, interest rate, exchange rate, money supply, and oil prices) and aggregate stock returns in BRICS markets over the period 1995-2014 using quarterly data. We have applied Auto Regressive Distributed Lag (ARDL) model to document such a relationship for individual countries as well as for panel data.
In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock ... more In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock Market. For this, daily data for 11sectoral indices on NSE viz. Auto, Bank, Energy, Finance, FMCG, IT, Media, Metal, Pharma, PSU Banks, and Realty Index have been used. The study period spans from Jan 2004 to Jan 2014 covering a comprehensive 10 years including the recent global financial crisis. The analysis is done using unit root tests [Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS)]and Variance ratio tests [Chow Denning Joint Test, LoMackinlay Test and Wright (2000) Test based on Ranks and Signs]. The results suggest that although overall Indian stock market seems to be weak form efficient, but different sectors comprising it are not, especially during total study period. Further we find evidence of increased inefficiency in Bank, Metal, PSU Bank and Realty sectors in the post-crisis period. This may be due to investor's overreact...
In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock ... more In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock Market. For this, daily data for 11sectoral indices on NSE viz. Auto, Bank, Energy, Finance, FMCG, IT, Media, Metal, Pharma, PSU Banks, and Realty Index have been used. The study period spans from Jan 2004 to Jan 2014 covering a comprehensive 10 years including the recent global financial crisis. The analysis is done using unit root tests [Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS)]and Variance ratio tests [Chow Denning Joint Test, LoMackinlay Test and Wright (2000) Test based on Ranks and Signs]. The results suggest that although overall Indian stock market seems to be weak form efficient, but different sectors comprising it are not, especially during total study period. Further we find evidence of increased inefficiency in Bank, Metal, PSU Bank and Realty sectors in the post-crisis period. This may be due to investor's overreaction in Indian stock market. Tripathi & Aggarwal (2009) have reported that Indian investors tend to overreact to bad news and hence post crisis,the price discovery mechanism was not so efficient. The findings on sectoral efficiency in India have important implications for policy makers, mutual funds, portfolio managers and investors at large. Weak form inefficiency in Bank, Metal, PSU Bank and Realty sectors is suggestive of exploitable arbitrage opportunities in these sectors. The regulators and policy makers must also note that overall market efficiency may not imply efficiency at the sectoral level; for this, more efforts and sector specific reforms need to be taken. Keyword: Market Efficiency, Sectoral Efficiency, Weak form Market Efficiency, Indian Stock Market, Variance Ratio Test JEL Classification: G12, G14
This paper examines the relationship between various macroeconomic variables and banking stock re... more This paper examines the relationship between various macroeconomic variables and banking stock returns in order to find out significant sources of systematic risks in banking stock returns in India. Monthly data for the period 2002-2014 (further divided into a pre crisis and a post crisis period) has been analysed using unit root test, correlation, regression, Granger causality (both short and long run) and cointegration tests. Results reveal that exchange rate, market factor and long term interest rate are significant in explaining banking stock returns in India in total and post crisis periods 2 (with R being 82% and 87% respectively). Short run causality results reveal unidirectional causality from long run interest rate to banking stock returns and from banking stock returns to market returns. On the other hand, long run causality results reveal that inflation and money supply Granger cause bankex while bankex Granger causes IIP and short term interest rate. Hence, there seem to be a lead lag relationship between banking stock returns and various macroeconomic sources of risks. We found long run cointegration of banking stock returns with money supply and short run interest rate. These results provide support to the argument that besides market risk, interest rate risk and currency risk are also priced in banking stock returns. These findings are pertinent for policy makers, regulators and investors at large.
With its unconventional and unprecedented growth on a sustained basis, the contribution of Servic... more With its unconventional and unprecedented growth on a sustained basis, the contribution of Service sector to India's economy in terms of GDP, income & employment generation, international trade and investment flows, improvement in per capita income and standards of living of general Indians has been both tremendous and amazing. In this light, the behaviour of Service Sector in Indian Stock market is also gaining attention. In a one of its kind study, this paper undertakes a comprehensive examination of Indian Service Sector Stocks from various dimensions, viz., Weak Form Efficiency, Determinants and Performance. We study service sector through nine sectoral indices of BSE (Bank, Energy, Finance, Health Care, IT, Power, Realty, TECK and Telecom) and one broad thematic Service Sector Index of NSE using monthly data from September 2005 to October 2015. We measure their adherence to Random Walk Hypothesis (Weak Form Efficiency) through a battery of Unit Root Tests [Augmented Dickey Fuller (ADF), Phillips–Perron (PP) & Kwiatkowski-Phillips-Schmidt-Shin (KPSS)] and Variance Ratio Tests [Lo-MacKinlay, Wright's Ranks & Wright's Signs). We further employ proxies for Stock Market [BSE Sensex for Indian Stock Market & MSCI All Country World Index (MSCI ACWI) for Global Equity Markets] and prominent Macroeconomic Variables [Index of Industrial Production (IIP), Inflation (CPI), Interest Rate, Exchange Rate] as Regressors through Multiple Regression Analysis to find out the major determinants of Indian Service Sector Stock Returns. Finally, we also evaluate the performance of these Service sector Indices through three popular Performance measure ratios, i.e., Sharpe Ratio, Treynor Ratio and Jensen's Alpha. Overall, the Efficiency tests reveal that all Indian Service Sector Indices are indeed following the Random Walk Hypothesis and are I(1). All the Regression models were highly significant with very high explanatory powers and no problem of multicollinearity or autocorrelation. Across the board, Exchange Rate from amongst the Macroeconomic Variables and Sensex from Stock Market Variables came out to be the significant determinants of Indian Service Sector Stock Returns. Performance evaluation measures indicated that almost half of the service sector indices lead by Healthcare could significantly outperform the broader market on risk adjusted basis. These results are relevant and have pertinent implications for a broad range of stakeholders related to the field including policy makers, regulators, investors, academicians and researchers.
This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, ... more This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate and Money Supply) and aggregate stock returns in emerging markets constituting the BRICS block over the period 1995 to 2014 using quarterly panel data. This relationship is also examined during two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Robust econometric tests like Panel Granger Causality Test, Pedroni's Panel Cointegration Test and Panel Auto Regressive Distributed Lag (ARDL) Model has been used. We find that primarily in short run there is unidirectional causality running from stock returns to GDP growth rate, inflation rate, rate of change in exchange rate and money supply. The results are almost similar in pre and post crisis periods, except that in the pre crisis period, there is bidirectional causality between stock returns and inflation, while in the post crisis period it disappears. Long run panel causality results reveals unidirectional causality from stock returns to GDP growth rate in total and post crisis periods. However in pre crisis period, there was no long run causal relationship. Pedroni's panel cointegration test shows that stock indices are cointegrated with GDP in total period and with GDP, inflation and money supply in post crisis period. Panel ARDL models have explanatory power ranging from 28% in total period to 62% in post crisis period. We find that while current stock returns are negatively linked to rate of change in exchange rate and money supply; they are positively linked to their own lagged values. In pre crisis period, rate of change in money supply significantly explains stock returns while in post crisis period, inflation rate, interest rate and rate of change in exchange rate and money supply negatively affects BRICS panel stock returns. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, researchers and investing community in emerging markets. The regulators need to ensure that financial sector reforms agenda consciously considers interlinkages between stock markets and real economy. The investment community can devise investment strategy, using the results of this study to earn arbitrage profits in emerging stock markets.
This paper comprehensively examines the long run relationship between aggregate stock prices and ... more This paper comprehensively examines the long run relationship between aggregate stock prices and select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate, Money Supply and International Oil Prices) in the emerging BRICS markets over the period 1995 to 2014 using quarterly data. To assess the impact of global financial crisis on this relationship, we consider two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Long Run Granger Causality Test, Johansen’s Cointegration Test (both Bivariate & Multivariate) and Vector Error Correction Mechanism (VECM) are applied. Overall, we find that there is unidirectional long run causality from Stock prices to GDP, Inflation & Interest Rate. A bidirectional long run causal relationship of Stock prices is found with Money Supply and Oil Prices. Also, the long run granger causal relationship differs significantly between pre and post crisis periods for all the macroeconomic variables. Johansen’s Cointegration results suggest presence of long run equilibrium relationship between BRICS Stock prices and select Macroeconomic Factors (except Inflation and Oil Prices). There was no major difference in cointegration results in pre and post crisis periods except for Inflation and Interest rate, implying that global financial crisis has led to greater long run integration of stock market with the real economy. VECM results indicate that error correction to restore equilibrium is more in stock market than in macroeconomic factors. Thus, in times of any destabilisation or disequilibrium in long run the real economy leads the stock market to a new equilibrium. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, academicians, researchers and investment community particularly in emerging markets.
Volatility spillover among major equity markets has long fascinated academicians and researchers ... more Volatility spillover among major equity markets has long fascinated academicians and researchers alike. This paper presents an elaborate survey and analysis of the literature on the subject. Review of extant studies on various basis such as markets studied, methodology employed, among others has important implications for various stakeholders. We report that there has been wide variation in results because different studies have examined different markets using wide range of financial econometric methodologies. Some have considered only volatility or both volatility and spillover. Still others have incorporated the impact of global financial crisis on volatility spillover. Future researchers should examine if there is any volatility spillovers between various sectors of an economy, between different financial markets of the same economy, amongst same sectors of different markets, probe whether size effect is relevant, identify the transmission channels of volatility spillover, enumerate reasons behind volatility spillover, examine asymmetric volatility responses among stock markets and can use more advanced econometric techniques.
The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macroeconom... more The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macroeconomic variables (sources of systematic risk) in explaining stock returns. In the same vein, this paper examines the relationship between macroeconomic variables (GDP, inflation, interest rate, exchange rate, money supply, and oil prices) and aggregate stock returns in BRICS markets over the period 1995-2014 using quarterly data. We have applied Auto Regressive Distributed Lag (ARDL) model to document such a relationship for individual countries as well as for panel data. Contrary to general belief, we find that GDP and inflation are not found to be significantly affecting stock returns in most of BRICS markets mainly because Stock returns generally tend to lead rather than follow GDP and inflation. In line with the theory and literature, we find significant negative impact of interest rate, exchange rate and oil prices on stock returns and a positive impact of money supply. This study would be a valuable addition to the growing body of empirical literature on the subject besides being useful to policy makers, regulators and investment community. Policy makers and regulator should watch out for impact of fluctuations in exchange rate, interest rate, money supply, and oil prices on volatility in their stock markets. Investor can search for arbitrage opportunities in BRICS markets on the basis of these variables but not the basis of GDP or inflation.
Relationship between stock market performance and macroeconomic variables has intrigued and is of... more Relationship between stock market performance and macroeconomic variables has intrigued and is of pertinent importance to policy makers, regulators, academicians, researchers and investment community. This paper presents a comprehensive theoretical framework underpinning this relationship and also provides an extensive critical analysis of existing literature on the subject. Theory suggests that stock market performance has positive relationship with GDP, Money Supply, Industrial Production, Foreign Exchange Reserves, Balance of Trade, Net FPI and FDI Inflows. It is negatively related with Inflation, Interest Rate, Gold Price and Oil Prices. Relationship of stock market with exchange rate and fiscal deficit is not clear. Critical examination of literature on various bases suggests that while this relationship is clearly established for developed markets, there is no unanimity for this relationship regarding emerging markets. Also, while some prominent macroeconomic variables which affect stock market performance can be identified, an exhaustive list of macroeconomic variables cannot be drawn. There has been a shift in econometric methods applied from basic tools to more advanced second generation financial econometric techniques Future researchers should focus on examining this relationship for emerging markets, consider a comprehensive set of macroeconomic and stock market performance variables, take a fairly long study period, apply modern financial econometric techniques, explore this relation at sectoral level and incorporate impact of recent global financial crisis in their study.
Equity investment is assumed to be a good hedge against inflation since long time. This paper exa... more Equity investment is assumed to be a good hedge against inflation since long time. This paper examines short run causal relationship between inflation and stock return in emerging BRICS markets. The study covers a comprehensive period of 13 years from the year 2000 to 2013 using quarterly data. The regression results reveal a significant positive relationship between changes in inflation and stock returns only in case of Brazil. But, Granger causality results reveal unidirectional causality from stock return to changes in inflation in Russia, India and South Africa and bidirectional causality in China. Hence, there seem to be a cause and effect relationship between stock returns and inflation in emerging markets. The results are of pertinent importance in today‟s context where emerging markets are facing the problems of rising inflation and volatile stock returns. The policy regulators need to understand these dynamics between inflation and stock returns to ensure better regulation of the markets. For investors particularly large and institutional investors the study findings support trading based on inflation forecasts. efficiency of Indian stock market.
In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock... more In a first of its kind, this paper examines the issue of sectoral efficiency of the Indian Stock Market. For this, daily data for 11sectoral indices on NSE viz. Auto, Bank, Energy, Finance, FMCG, IT, Media, Metal, Pharma, PSU Banks, and Realty Index have been used. The study period spans from Jan 2004 to Jan 2014 covering a comprehensive 10 years including the recent global financial crisis. The analysis is done using unit root tests [Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS)]and Variance ratio tests [Chow Denning Joint Test, LoMackinlay Test and Wright (2000) Test based on Ranks and Signs]. The results suggest that although overall Indian stock market seems to be weak form efficient, but different sectors comprising it are not, especially during total study period. Further we find evidence of increased inefficiency in Bank, Metal, PSU Bank and Realty sectors in the post-crisis period. This may be due to investor’s overreaction in Indian stock market. Tripathi & Aggarwal (2009) have reported that Indian investors tend to overreact to bad news and hence post-crisis, the price discovery mechanism was not so efficient. The findings on sectoral efficiency in India have important implications for policy makers, mutual funds, portfolio managers and investors at large. Weak form inefficiency in Bank, Metal, PSU Bank and Realty sectors is suggestive of exploitable arbitrage opportunities in these sectors. The regulators and policy makers must also note that overall market efficiency may not imply efficiency at the sectoral level; for this, more efforts and sector specific reforms need to be taken.
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Papers by Arnav Kumar
Theory suggests that stock market performance has positive relationship with GDP, Money Supply, Industrial Production, Foreign Exchange Reserves, Balance of Trade, Net FPI and FDI Inflows. It is negatively related with Inflation, Interest Rate, Gold Price and Oil Prices. Relationship of stock market with exchange rate and fiscal deficit is not clear.
Critical examination of literature on various bases suggests that while this relationship is clearly established for developed markets, there is no unanimity for this relationship regarding emerging markets. Also, while some prominent macroeconomic variables which affect stock market performance can be identified, an exhaustive list of macroeconomic variables cannot be drawn. There has been a shift in econometric methods applied from basic tools to more advanced second generation financial econometric techniques
Future researchers should focus on examining this relationship for emerging markets, consider a comprehensive set of macroeconomic and stock market performance variables, take a fairly long study period, apply modern financial econometric techniques, explore this relation at sectoral level and incorporate impact of recent global financial crisis in their study.
Theory suggests that stock market performance has positive relationship with GDP, Money Supply, Industrial Production, Foreign Exchange Reserves, Balance of Trade, Net FPI and FDI Inflows. It is negatively related with Inflation, Interest Rate, Gold Price and Oil Prices. Relationship of stock market with exchange rate and fiscal deficit is not clear.
Critical examination of literature on various bases suggests that while this relationship is clearly established for developed markets, there is no unanimity for this relationship regarding emerging markets. Also, while some prominent macroeconomic variables which affect stock market performance can be identified, an exhaustive list of macroeconomic variables cannot be drawn. There has been a shift in econometric methods applied from basic tools to more advanced second generation financial econometric techniques
Future researchers should focus on examining this relationship for emerging markets, consider a comprehensive set of macroeconomic and stock market performance variables, take a fairly long study period, apply modern financial econometric techniques, explore this relation at sectoral level and incorporate impact of recent global financial crisis in their study.