A Study on Causality and Long Run Association between BSE Indices and Macroeconomic Indicators

Finance

This empirical study investigates the relationship between BSE indices and macroeconomic determinants for the period 2004-2005 to 2015-2016. The study aims to find the causality and long run association between BSE indices and macroeconomic factors with the help of econometrics tools such as Unit Root Test Analysis, Johanson Cointegration Test, and Granger Casualty Test. The bivariate cointegration (Johanson Cointegration Test) results revealed the long term relationship between BSE Indices (comprising BSE Sensex, BSE 100, BSE 200, BSE 500 and BSE All Cap) and macroeconomic factors during the study period. It is found that all the macroeconomic variables are cointegrated with BSE Indices and exogenous variables such as Cash Reserve Ratio (CRR), Gross Domestic Formation (GCF) and Index of Industrial Production (IIP) granger caused BSE Indices of Bombay Stock Exchange in bi-directional mode. It is also observed from the results that exogenous variables such as Gross Domestic Product (GDP), Inflation, Rate (IR), Gross Domestic Savings (GDS), and statutory liquidity ratio (SLR) granger caused with BSE Indices in uni-directional mode.

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