Dynamic Relationship between Macro Economic Indicators and Indian Capital Market

An Application of ADRL Bound Testing Approach

Abstract

This empirical study intends to examine the dynamic long andthe short run relationship between capital market return (BSESensex return) and select macro-economic variables in India usingAuto Regressive Distributed Lag (ARDL) Methodology. It can beseen that there is a long run equilibrium relationship between
capital market return and macroeconomic variables in India.Empirical results show that FIIs investment and wholesale priceindex have significant impact on the performance of Indiancapital market. FIIs investment is statistically significant and haspositive impact on the capital market of India. The wholesale
price index has an adverse impact on capital market return. Butexchange rate, interest rate, index of industrial production andgold price are statistically insignificant for the performance ofthe domestic capital market. Variance Decomposition Analysis(VDA) is also used to explore how much forecast error variance
of conditional stock market volatility is explained by theinnovation of each explanatory conditional macro-economicvariables. The result of VDA shows that the capital market returnis mostly explained by its own shock.Keywords: ADF, AIC, ARDL, stock returns