Do Macro-Economic Variables Explain Stock-Market Returns? Evidence Using a Semi-Parametric Approach
Journal of Asset Management, Vol. 28, pp. 1-13, April 2011
13 Pages Posted: 4 Oct 2011
Date Written: October 3, 2011
In this paper we test whether the stock-market in India is driven by macro-economic fundamentals. We employ a non-parametric approach to determine whether any variables are non-linearly related with stock returns and the variability of stock returns by taking monthly observations from 1998 to 2008. We consider exchange rate, interest rate, industrial production, inflation and foreign institutional investments as macro-economic factors. Further, we employ a semi-parametric approach to see whether any of the macro-variables have a significant non-linear impact on the stock return and on the variability of stock return. Our results suggest that of the Ordinary Least Square (OLS) and semi-parametric approaches, the semi-parametric approach better explains the stock returns and volatility.
Keywords: semi-parametric model, Indian stock return, macro-economic variables
JEL Classification: C14, E44
Suggested Citation: Suggested Citation