Econometric Analysis of Relationship between Selected Economic Variables and BSE Stock Index in India Using Tests of Co-integration

Abstract

The focal point of writings in the field of budgetary financial matters for a long time has been on the interrelationship between movement of stock indices and the macroeconomic factors in the economies. It is unquestionable that stock market positions are basically irregular which are for the most part accepted to be influenced by national and international news. It is anyway obvious that the stock index positions are controlled by demand and supply of stocks recorded in it. By and large the demand for stocks and confidence of individuals on them is controlled by numerous elements including the macroeconomic factors of the nation. The present study aims to investigate the long term relationship of few selected macroeconomic indicators with a proxy of the stock market movement i.e BSE 500 for the period 1998-2018.Unit root test was applied to check the stationarity of the data series and all these were found stationary at lag 1. The Johansen’s test results for cointegration suggest that GDP, urban population and BSE Sensex share a long term relationship or are cointegrated. Findings suggest that since Indian industries are still not technologically advanced and are labour intensive, rise in availability of workers in the country reduces the labour cost which is a major portion of the total cost of production. When cost goes down, revenue rises which paves way for rise in the stock price and overall stock market movement