A Study of Granger Causality of Macroeconomic Factors on Indian Stock Markets
6 Pages Posted: 21 Jan 2012
Date Written: January 20, 2012
Abstract
Volatility in financial markets is a phenomenon which is influenced by many factors. For the very reason that unexpected volatility in the market can lead to severe losses, tracking and determining its trend become very much necessary. This study focuses on identifying the factors which affect the volatility in Indian stock markets. For this purpose, certain macroeconomic variables are considered, including exchange rates, crude oil prices, interest rates, gold prices, and so on. These variables are analysed along with the movement of S&P CNX Nifty. The study uses vector autoregressive techniques and Granger causality tests to determine whether each of the factors have a significant impact on market volatility, as well as volatility of individual stocks.
The findings of the study suggest that individually none of the macroeconomic variables have a significant impact on the volatility of Nifty. However, a very important finding is the movement of the exchange rate is significantly impacted by the stock market, which is quite visible in the current market scenerio. There is a further scope for study using the Ganger causality test to further analyse the volatilty trend of individual stocks.
Keywords: volatility, macroeconomic factors, vector autoregressive techniques, Granger causality tests
JEL Classification: G12, G10
Suggested Citation: Suggested Citation