This study examines the short-run and long-run causal relationships between selected macroeconomic variables and stock market returns in the emerging Indian economy Stock Exchange during the period of 1995 until 2004 using the modern techniques of Granger causality and cointegration tests. The results of this study indicate both long-run and short-run unidirectional relationships from inflation, exchange rates and money supply to stock market returns on the Bombay Stock Exchange. A short-run unidirectional relationship was identified between trading volume and stock market returns, however, this relationship was identified as bidirectional in the long-run. Considering the developments in the exchange during the sample period, the empirical results are consistent with current theoretical arguments regarding these relationships.
with Simon Hanrahan, a revision of work done in his Final Year Project for the BBS.
Keywords: Indian Stock Exchange, Financial Time Series, Cointegration.
JEL Codes: C01; C50; D53
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