An Empirical Analysis of Stock Market Performance and Economic Growth: Evidence from India

Paramati, S.R. and Gupta, R. (2011) An empirical analysis of stock market performance and economic growth: Evidence from India. International Research Journal of Finance and Economics, Issue 73, 133-149.

17 Pages Posted: 9 Oct 2013 Last revised: 11 Jul 2017

See all articles by Sudharshan Reddy Paramati

Sudharshan Reddy Paramati

University of Dundee; affiliation not provided to SSRN

Rakesh Gupta

Griffith University - Griffith Business School; CQ University; Association of Personal Finance and Investments

Date Written: September 1, 2011

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: Stock market performance, economic growth, causality test, short-run and long-run dynamics

JEL Classification: E44, O16

Suggested Citation

Paramati, Sudharshan Reddy and Paramati, Sudharshan Reddy and Gupta, Rakesh, An Empirical Analysis of Stock Market Performance and Economic Growth: Evidence from India (September 1, 2011). Paramati, S.R. and Gupta, R. (2011) An empirical analysis of stock market performance and economic growth: Evidence from India. International Research Journal of Finance and Economics, Issue 73, 133-149. , Available at SSRN: https://ssrn.com/abstract=2335996 or http://dx.doi.org/10.2139/ssrn.2335996

Sudharshan Reddy Paramati (Contact Author)

University of Dundee ( email )

Dundee, Scotland DD1 4HN
United Kingdom
0138284845 (Phone)
DD1 4HN (Fax)

affiliation not provided to SSRN

Rakesh Gupta

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia
+61 7 37357593 (Phone)
+61 7 3735 3719 (Fax)

CQ University ( email )

B-33, G-26
Fabie
North Rockhampton, QLD 4701
Australia
+61 7 4930 9158 (Phone)

Association of Personal Finance and Investments

Bruce Highway
Rockhampton
Australia
61749309158 (Phone)

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