1

INTRODUCTION
Indian capital market has gone tremendous changes since 1991 when the government
issued economic reforms and has adopted liberalization and globalization policies. Now a
days, stock market have become a key driver of modern market based economy and is one
of the major sources of raising resources for Indian corporate that enabling financial
development and economic growth. In other words, stock markets are said to reflect the
health of the countrys economy. Any movement in SENSEX is explained through various
factors like listed companies performances, government rules and regulation, sale and
purchase transaction in the particular period, arbitragers and speculators interferences and
many other factors. Numerous domestic and international factors directly or indirectly
affect the performance of the stock market. Stock market is basically influenced by many
factors which are divided into two categories macroeconomic factors and fundamental
factors. Fundamental factors includes corporate performance, industrial growth etc exert a
certain amount of influence on the stock markets. On the other hand, macroeconomic
variables include Interest Rate, Inflation, Exchange Rate, Index of Industrial Production,
Money Supply, Gold Price, Silver Price and Oil Price, credit deposit ratio and fiscal deficit
etc. Results of this study will help in exploring whether the movement of Bombay Stock
Exchange and National stock exchange indices is the result of some selected
macroeconomic variables or it is one of the causes of movement in those variables of the
Indian economy. The study consider macroeconomic variables as Exchange rate, Foreign
Reserves, Balance of trade, inflation rate and exchange rate by using monthly data that
span from April,2008 to March, 2016. More specifically, in the study we use normality
test, Correlation and Regression analysis, unit root test and Granger Casually test to see the
effect of macroeconomic variables on major Stock Exchanges in India (by using granger
causality test). The results would be very useful for the policy markers, traders, investors,
and other concerned along with the future researchers. There are various analyzing models
like granger causality test, Ducky Fuller test, factors analysis, ANOVA, unit root test etc.

By applying these statistical tools and techniques of analysis, it is very easy to study the
impact of future changes.
The rest of the study is organized as follow. Module 1 is a survey of the existing literature
including empirical results on the nature of casual relationship between macroeconomic
variables and stock prices is conducted. Module 2 is presents the data descriptions and
variables undertaken for the study. Module 3 presents research methodology to be
employed for investigation and analysis purposes. Module 4 reports the empirical results
and discussions of descriptive statistics, ADF test, Correlation and Regression analysis and
Granger Casually test which are followed by conclusion. Before going on explaining the
full study of the relationship, it is necessary to understand share market and macro
economy so that a base can be made for study.
A stock exchange market is the centre of a network of transactions where buyers and
sellers of securities meet at a specified price. Stock market plays a key role in the
mobilization of capital in emerging and developed countries, leading to the growth of
economy and commerce and trade of the country, as a result of liberalized and globalized
policies adopted by most emerging and developed government. Many factors can be a
signal to stock market participants to expect a higher or lower return when investing in
stock and one of these factors are macroeconomic variables. The change in
macroeconomic variables can significantly impact stock price return.
According to Husband and Dockerary,
Stock exchanges are privately organized markets which are used to facilitate
trading in securities.
The Securities contacts (regulations) Act, 1956 defines stock exchange as
An association organization or body of individuals, whether incorporated or assisting,
regulating and controlling business in buying, selling and dealing in securities.

STOCK MARKET:
Trading in the secondary market is done through stock exchange. The Stock exchange is a
place where the buyers and sellers meet to trade in shares in an organized manner. The
stock exchange performs the following functions:

 Provide trading platform to investors and provide liquidity

Facilitate Listing of securities
Registers members - Stock Brokers, sub brokers
Make and enforce by-laws
Manage risk in securities transactions
Provides Indices
There are two leading stock exchanges in India which help us trade are:

National Stock Exchange:

National Stock Exchange incorporated in the year 1992 provides trading in the equity as
well as debt market. Maximum volumes take place on NSE and hence enjoy leadership
position in the country today. The National Stock Exchange (NSE) is India's leading stock
exchange covering 364 cities and towns across the country. NSE was set up by leading
institutions to provide a modern, fully automated screen-based trading system with
national reach. The Exchange has brought about unparalleled transparency, speed &
efficiency, safety and market integrity. It has set up facilities that serve as a model for the
securities industry in terms of systems, practices and procedures.
NSE's mission is setting the agenda for change in the securities markets in India. The NSE
was set-up with the following objectives:
establishing a nation-wide trading facility for equities, debt instruments and hybrids,
ensuring equal access to investors all over the country through an appropriate
communication network,
providing a fair, efficient and transparent securities market to investors using electronic
trading systems,
enabling shorter settlement cycles and book entry settlements systems, and
Meeting the current international standards of securities markets.

Bombay Stock Exchange:

BSE on the other hand was set up in the year 1875 and is the oldest stock exchange in
Asia. It has evolved in to its present status as the premier stock exchange. BSE was
established in 1875 as "The Native Share and Stock Brokers Association". It is the oldest
one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It
is a voluntary non-profit making Association of Persons (AOP) and has converted itself
into demutualised and corporate entity. It has evolved over the years into its present status
as the Premier Stock Exchange in the country. It is the first Stock Exchange in the Country
to have obtained permanent recognition in 1956 from the Govt. of India under the
Securities Contracts (Regulation) Act, 1956.

Functions of stock exchange:

The progressive of companies that controls the industrial and trading activities under the
complete economic conditions is ensured by availability of adequate finance for their
investment schemes. It performs many functions some of these are following:
Buying and selling of securities: The stock exchange provides appropriate
conditions whereby purchase and sale of securities takes place at reasonable and fair
prices of buyers and sellers are recorded on the basis, which each investor is able to
evaluate the securities held by him and thus knows the worth of his holdings at
particular time.
Ready Market: The stock exchange provides a ready market for the conversation of
exchange securities into cash and vice-versa.
Opportunities for investment: People having surplus funds invest in securities and
these funds are used for industrialization and economic development of country that
leads to capital formation.
Protection of investors: Stock exchange protects the interest of investors through
strict enforcement of rules and regulations with respect to dealings. Punishment
(including fine, suspension or even expulsion of members) may be there if brokers
adopt any malpractice in dealing with investor like charging exclusively high
commission etc.

 Source of information: The stock exchange act as a center of providing business

information relating to the enterprise whose securities are raided as listed companies
are to present their financial and other statements to it.
Contributes to Economic Growth: A stock exchange provides liquidity to
securities. This gives the investor a double benefit-first, the benefit of the change in
the market price of securities can be taken advantage of, and secondly, in case of
need for money they can be sold at the existing market price at any time. These
advantages provided by the share market encourage the people to invest their money
in securities. In this way, peoples money gets invested in industries and economic
development becomes possible.
Spreading Equity Cult: Share market collects each and every type of information
(more particularly about their economic condition) in respect of all the listed
companies in stock exchange. Generally, this information is published or in case of
need anybody can get it from the stock exchange free of any cost at anytime. In this
way, the stock exchange guides the investors by providing various types of
information. Consequently, the number of shareholders in companies is increasing
continuously. Thus, the stock exchanges are playing a vital role in ensuring wider share
ownership.
Providing Scope for Speculation: When securities are purchased with a view to
getting profit as a result of change in their market price, it is known as speculation. It is
allowed or permitted under the provisions of the relevant Act. It is accepted that in
order to provide liquidity to securities, some scope for speculation must be allowed.
The share market provides this facility. Investors buy the securities in high volume
with the expectations of increase or decrease in prices of the securities.
Economic Barometer: A stock exchange is a reliable barometer to measure the
economic condition of a country. Every major change in country and economy is
reflected in the prices of shares. The rise or fall in the share prices indicates the boom
or recession cycle of the economy. Stock exchange is also known as a pulse of
economy or economic mirror which reflects the economic conditions of a country.
Liquidity: The main function of stock market is to provide ready market for sale and
purchase of securities. The presence of stock exchange market gives assurance to

investors that their investment can be converted into cash whenever they want. The
investors can invest in long term investment projects without any hesitation, as because
of stock exchange they can convert long term investment into short term and medium
term.
Better Allocation of Capital: The shares of profit making companies are quoted at
higher prices and are actively traded so such companies can easily raise fresh capital
from stock market. The general public hesitates to invest in securities of loss making
companies. So stock exchange facilitates allocation of investors fund to profitable
channels.
Promotes the Habits of Savings and Investment: The stock market offers attractive
opportunities of investment in various securities. These attractive opportunities
encourage people to save more and invest in securities of corporate sector rather than
investing in unproductive assets such as gold, silver, etc.

Features of BSE and NSE:

Market Timings: Trading on the equities segment takes place on all days of the week
(except Saturdays and Sundays and holidays declared by the Exchange in advance).
The market timings of the equities segment are:
Normal Market Open: 09:55 AM and Normal Market Close: 15:30 PM
The Post Closing Session is held between 15.50 to 16.00 PM
Automated Trading System: Today our country has an advanced trading system
which is a fully automated screen based trading system. This system adopts the
principle of an order driven market as opposed to a quote driven system.
I) NSE operates on the 'National Exchange for Automated Trading' (NEAT) system.
II) BSE operates on the BSEs Online Trading (BOLT) system.
Order Matching Rules in Automated trading system: The best buy order is matched
with the best sell order. An order may match partially with another order resulting in
multiple trades. For order matching, the best buy order is the one with the highest price
and the best sell order is the one with the lowest price. This is because the system
views all buy orders available from the point of view of a seller

And all sell orders from the point of view of the buyers in the market. So, of all buy
orders available in the market at any point of time, a seller would obviously like to sell
at the highest possible buy price that is offered. Hence, the best buy order is the order
with the highest price and the best sell order is the order with the lowest price.
Order Conditions in Automated Trading System: A Trading Member can enter
various types of orders depending upon his/her requirements. These conditions are
broadly classified into three categories:
Time Related Condition
Price Related Condition
Quantity Related Condition
Listing of Securities: Listing means admission of the securities to dealings on a
recognized stock exchange. The securities may be of any public limited company,
Central

or

State

Government,

quasi

governmental

and

other

financial

institutions/corporations, municipalities, etc. The objectives of listing are mainly to provide liquidity to securities;
mobilize savings for economic development;
Protect interest of investors by ensuring full disclosures.
The Exchange has a separate Listing Department to grant approval for listing to grant
approval for listing of securities of companies in accordance with the provisions of the
Securities Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules,
1957, Companies Act, 1956, Guidelines issued by SEBI and Rules, Bye-laws and
Regulations of the Exchange.

Opportunities Available For Foreign Investors:

Direct Investment: Foreign companies are now permitted to have a majority stake
in their Indian affiliates except in a few restricted industries. In certain specific
industries, foreigners can even have holding up to 100 percent.

 Investment through Stock Exchanges: Foreign Institutional Investors (FIIs) upon

registration with the Securities and Exchange Board of India (SEBI) and Reserve
Bank of India (RBI) are allowed to operate on the Indian stock exchanges subject
to the guidelines issued for the purpose by SEBI.
Investment in Euro Issues/Mutual Funds floated overseas: Portfolio investment
in primary or secondary market of a company by all registered FIIs, NRIs and
OCBs is subject to a ceiling of 30/40 per cent of issued share capital. In any one
company, holding by a single FII, NRI or OCB is subject to a ceiling of 10 percent
of the total issued capital. However, in applying the ceiling of 30/40 percent the
following are excluded
Broking Business: Foreign brokers upon registration with the SEBI are now
allowed to route the business of their registered FIIs clients through the members of
Stock Exchanges. Guidelines for the purpose have been issued by SEBI.
Asset Management Companies: Merchant Banking: Foreign participation in
Asset Management Companies and Merchant Banking Companies is permitted.
In the era of globalization, FDI is a major source of capital inflow in most of developing
economies where it bridges the gap of capital, technology, managerial skill, human capital
formation and more competitive business environment. The role of FDI in the
development of stock markets of developing economies is considered very strong. It is
observed that there is triangular causal relationship between these two FDI stimulates
economic growth, Economic growth exerts positive impact on stock market development
and implication is that FDI promotes stock market development.
Macroeconomics is the branch of economics that study the behavior and performance of an
economy as a whole. It focuses on the aggregate changes in the economy such as
employment, growth rate, and gross domestic product (GDP) and inflation.
Macroeconomics analyzes all aggregate indicators that that influence the economy. Indian
government and other financial institutions and companies use macroeconomic models in
the formulation of economic policies.

Macroeconomic variables in context with stock market include inflation, output, private
consumption, oil prices, interest rate, gold prices, foreign direct investment, gross domestic
product, industrial production, dividend and Treasury bill rates.
Among different macro-economic variables considered to be affecting stock indices of
India, We have included five of them viz. Inflation Rate, Exchange Rate, Foreign exchange
reserves, Balance of trade and Interest rate. Although the selection is more judgmental,
there are strong evidences to believe the relationship.

Interest Rate
The pure rate of interest is defined by Reilly and Brown (2003) as the rate of exchange
between future and current consumption. When people accepted to pay this difference
when borrowing money and receiving it on their saving, this caused the emergence interest
rate which the authors referred to as the pure time. Interest rate is that rate at which banks,
financial institutions and other organizations provides loans to general public and
companies, firms, organizations etc. Interest rates are the cost of borrowing money. Interest
rates are normally expressed as a % of the total borrowed; e.g. for a 30 year mortgage, a
bank may charge 5% interest per year The money market rate is considered as a base for
interest rate. The money market is a segment of the financial market in which financial
instruments with high liquidity and very short maturity period are traded. The money
market is used by its participants or members as a means of borrowing and lending in the
short term. An increase in the interest rate will result in falling of stock prices due to the
fact that high interest rate will increase the opportunity cost of holding money. Interest rate
is one of the important macroeconomic variables and is directly related to economic
growth. From the point of view of a borrower, interest rate is the cost of borrowing money
while from a lenders point of view; interest rate is the gain from lending money. The
interest rate is expected to be negatively associated to stock returns.

Exchange Rate
The exchange rate is that rate at which one currency trades against another on the foreign
exchange market or Price for which the currency of a country can be exchanged for
another country's currency. Factors that influence exchange rate include

interest

rates,

inflation rate, trade balance, political stability, internal harmony. An increase in exchange
rate (depreciation) will cause a decline in stock prices because of expectations of inflation.

Moreover, heavy importer companies will suffer from higher costs due to a weaker
domestic currency and will have lower earnings, and lower share prices. As a result, the
stock market, which is a collection of a variety of companies, trends to react negatively to
currency depreciation. However, domestic exporters benefit from currency depreciation
because it causes domestic products to become cheaper to foreign clients. So on
macroeconomic level, currency depreciation will boost the domestic export industry and
depress the import industry. Overall, the effect of exchange rate on stock prices can be
either a positive or a negative relationship. Kumar, (2008) examined the relationship
between exchange rate and stock market in India during the period of 1998- 2008. Kumar
concluded that the sensex and the Dollar exchange rate are not related to each other.
Vejzagic and Zarafat (2013) found that changes in exchange rates would have an impact
on the firms competitiveness as it affects the price of foreign currency, leading to changes
in the firms profits and equity, which in return will lead to price adjustments in the stock
market.

Inflation
McConnell et al. (2012) defined inflation as an increase in the general price levels. When
inflation occurs, purchasing power decreases as each unit of income can buy less goods
and services. Inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time. Inflation reflects instable macroeconomic
environment in a country. This leads to increase in the perceived risk of making investment
in such countries, which further leads to negative impact on FDI inflows. Further, when
the rate of inflation is high, the real returns on investment reduce. Therefore, it can be
concluded that FDI inflows and inflation are inversely related. Inflation affects an
economy in various positive and negative ways. Negative effects of inflation include an
increase in the opportunity cost of holding money, uncertainty over future inflation which
may discourage investment and savings, and if inflation were rapid enough, shortages
of goods as consumers begin hoarding out of concern that prices will increase in the future.
Positive effects include reducing the real burden of public and private debt, keeping
nominal interest rates above zero so that central banks can adjust interest rates to stabilize
the economy, and reducing unemployment due to nominal wage rigidity. Kumar, (2008)
examined the relationship between inflation and stock market in India during the period of

1998- 2008. In his study, Kumar concluded that there is no co integration between Sensex
and Inflation.

Foreign exchange reserves

Foreign exchange reserves are reserve assets held by a central bank in foreign currencies
used to back liabilities on their own issued currency as well as to influence monetary
policy. Foreign exchange reserves consist of any foreign currency held by a centralized
monetary authority. Foreign exchange reserves include foreign banknotes, bank deposits,
bonds, treasury bills and other government securities. Colloquially, the term can also
encompass gold reserves or IMF funds. Foreign reserve assets serve a variety of purposes
but are primarily used to give the central government flexibility and resilience; should one
or more currencies crash or become rapidly devalued, the central banking apparatus has
holdings in other currencies to help them withstand such markets shocks.

Trade Balances
The balance of trade is the difference between a nations exports and its imports. A crucial
point to note is that both goods and services are counted for exports and imports, as a
result of which a nation has a balance of trade for goods. It is also known as the
merchandise trade balance and a balance of trade for services. The net or overall figure
forms the balance of trade or trade balance, a major contributor to a country's economic
well-being. A nation has a trade surplus if its exports are greater than its imports; if imports
are greater than exports, the nation has a trade deficit.
RELATIONSHIP BETWEEN SHARE MARKET AND MACRO ECONOMICS:
The macro economy is just the sum of hundreds or thousands of markets and each of the
market is explained by microeconomic principles. Microeconomics is devoted to the study
of prices of individual goods and of the markets where these goods are produced and sold.
Why do we need two separate disciplines? To a very great extent they are inter related.
Microeconomics is dedicated to the analysis of market behavior of individuals firms and
individual company. Macroeconomics is concerned with collective behavior, the outcome
of individual decisions taken without full knowledge of what others do. The movement of

stock indices in India is highly sensitive to the changes in fundamentals of the economy
and to the changes in expectations about future prospects. Expectations are influenced by
the micro and macro fundamentals which may be formed either rationally or adaptively on
economic fundamentals, as well as by many subjective factors which are unpredictable and
also non quantifiable. It is assumed that domestic economic fundamentals play main
role in the performance of stock market. However, in the globally integrated economy,
domestic economic variables are also subject to change due to the policies adopted and
expected to be adopted by other countries or some global events. The common external
factors influencing the stock return would be stock prices in global economy, the interest
rate and the exchange rate. For instance, capital inflows and outflows are not determined
by domestic interest rate only but also by changes in the interest rate by major economies
in the world. Other burning example in India is the appreciation of currency due to higher
inflow of foreign exchange because in 2008, 100% FDI was allowed in the retail sector.
Rupee appreciation has declined stock prices of major export oriented companies.
Information technology and textile sector are the example of falling stock prices
due to rupee appreciation.

2
REVIEW OF LITERATURE
In the past decades, many industry researchers, financial analysts and practitioners have
attempted to predict the relationship between stock markets movement and
macroeconomic variables. They have conducted empirical studies to examine the effect of
stock price on macroeconomic variables or vice-versa or relationship between the two and
the results of all those studies have provided different conclusions according to the
combination of variables, methodologies and tests used. Here, we have discussed some
previous research works/papers and their empirical conclusions that are related to our
sector analysis
Kumar, (2008) examined the relationship between macro economic variables and stock
market in India during the period of 1998- 2008. ARIMA modeling was used to establish a
long- term relationship between stock prices and macro-economic variables. He used
Exchange rate and Inflation as macro-economic variables. He used Bombay Stock
Exchanges Ssensex as stock index variable and Whole Sale Price Index (WPI) for
Inflation. In his study, Kumar concluded that there is no co integration between sensex and
Inflation. Similarly, the sensex and the Dollar exchange rate are not related to each other.
Erbaykal, Okuyan and Kadioglu, (2008)investigated the relationship between eal macroeconomic variables and stock prices in Turkey under Proxy hypothesis developed by
Fama (1981) during the period 1987- 2006.In their study, they used stock prices,
consumption expenditures, industrial production index, employment level, fixed
investment and consumer price index(CPI) as real macro-economic variables. According to

this study, there is a positive relationship between the real macro-economic variables and
stock prices. It means that an increase in the real economic activities affects the inflation
negatively. And because of the negative relationship between the inflation and stock prices,
stock prices will
Ramcharranand Kim, (2008) investigated the impact of Financial Liberalization on
Equity Returns in Southeast Asian Markets during the period (1991-2000). They analyzed
six Asian equity markets (Korea, Philippines, Taiwan, Indonesia, Malaysia and Thailand)
using a dynamic adjustment model with three independent variables: market capitalization
value, price book value ratio. They used the LSDVR (least square dummy variable
regression) approach to identify the timing effects of liberalization. The valuation ratios
are the price-earnings and the price-book value; like the variable measuring returns, these
ratios are also market capitalization weighted. According to them, the coefficients are
negative and very small. The negative sign suggests that liberalization, resulting from
increased stock market sizes and diversification opportunities, has reduced risk and thus
the rate of return (consistent with finance theory).
Liu and Shrestha, (2008) analyzed the long-term relationship between macro-economic
variables and the Chinese stock market during the period from January 1992 to December
2001 with a sample size of 120 observations. In their study, they used money supply,
industrial production, inflation, exchange rate and interest rates as macro-economic
variables. They used heteroscedastic co integration analysis for finding a relationship.
They used SHSE composite index and SZSE composite index. Exchange rate (EX) is
denominated by the trade-weighted exchange rate index of the Chinese currency,
Renminbi (RMB). They found that the long-term relationship does exist between stock
market and their macro-economic variables. While the IP and MS are positively related to
the stock prices, inflation, interest rate and currency value are negatively related to the
stock prices. Their study shows that the Chinese stock market does react to changes in the
macro-economic variables in the long run, despite its high degree of speculation,
immaturity and short-term volatility.
Huang, (2006) investigated that whether the level and volatility of interest rates affect the
excess returns of major Asian listed property markets (Singapore, Hong Kong and Japan
and UK within a time-varying risk framework. He conducted his research during the timeperiod from December 1987 to April 2003.In his research paper, he used a three-factor

model with excess return volatility, interest rate level and interest rate volatility as its
factors. He used Hang Sang Property Index (HK), Singapore All-Equity Property Index
(Singapore), Tokyo SE Real Estate Index (Japan) and Financial Times Real Estate Index
(UK) as four samples. The GARCH-M methodology introduced by Engle et al. (1987) was
used to link the conditional variance to the conditional mean of returns and a basic
framework was provided to examine the relationship between volatility and expected
returns. Strong time-varying conditional volatility is found in the excess return series for
all markets. Overall property stock market volatility is more persistent in Singapore,
relative to the UK, HK and Japan. There is some evidence of a positive trade-off between
the excess returns and conditional variances for Singapore, Japan and the UK.
Liow, Ibrahim and Huang, (2006) analyzed the relationship between expected risk
premium on property stocks and some major macroeconomic risk factors of four major
markets, namely, Singapore, Hong Kong, Japan and the UK by using GMM Model. In this
paper, Macroeconomic risk is measured by the conditional volatility of macroeconomic
variables. GDP growth, INDP growth, unexpected inflation, money supply, interest rate
and exchange rate were used as macro economic variables. They found that excess stock
return of Hongkong was positively related to GDP, INDP, Inflation and exchange rate and
negatively related with Interest rate and money supply. In UK economy all five factors are
negatively correlated and in Japan all these factors are positively correlated and In
Singapore INDP is positive and GDP, Unexpected Inflation and Exchange rate are
negatively correlated.
Coleman and Tettey, (2008) examined the impact of macro-economic variables on
performance of stock markets during the period 1991-2005. They used stock exchange
performance (GSE), inflation rate, real exchange rate, and interest rate and Treasury bill
rate as macro-economic indicators and macro-econometric model a modified version of
Omole and Falokun (1996) as to establish the relation between macro-economic variables
and Ghana stock performance. They examined during the study that Inflation rate and
Lending rate are negatively related and Treasury bill rate is positively related to stock
performance and there is no impact of Exchange rate on stock performance.
Chandra, (2012) examined the cause and effect relation between foreign institutional
investment (FII) trading volume and stock market returns in the Indian context. The study
was conducted during the period 1 January 2003 to 28 February 2011. Granger-causality

approach was used to investigate the bi-directional causality between net FII trades and
returns. NSE S&P CNX NIFTY50 and FII flows in Indian market were used as samples of
the study and three different measures of trading volume in the FII category were
considered: Daily number of transactions by FIIs (NTRAN), Daily number of shares
traded by FIIs (NQNTY) and Daily value of trades by FIIs (NVAL). From his study, he
concluded that there is bi-directional relationship between stock returns and FII inflows in
Indian stock market.
Olowe, (2011)analyzed the impact of the introduction of the 2004 bank capital
Requirements on the quoted stock prices and this study was conducted in Nigerian context
for the period January 1986 to December 2006. Event study methodology was used to
investigate the impact of the introduction of the 2004 bank capital requirements on the
Nigerian stock market and 173 stocks were included as samples. He concluded that the
introduction of the 2004 bank capital requirements has a positive impact on quoted
securities on the Nigerian stock market. It means that positive average return could be
earned by investing in Nigerian stock market after the 2004 announcements by the Banks.
A possible explanation for the positive impact on stock prices could be due to high
expectation among the investors in the Nigerian stock market as many of the banks are
expected to raise substantial shares in the market.
Black, Macmillan and Macmillan, (2015) investigates the link between stock prices and
macro economic variables. Dividend, Output and Private consumption were used as macro
economic variables and stock prices and dividends standard log-linear present value
model of Campbell and Shiller (1988a), consumption and output permanent-income
hypothesis of Friedman, 1957, stock prices and dividends and output (Rangvid, 2006),
stock prices and Consumption Menzlyet al., 2004 and consumption and dividends (Bansal
and Yaron, 2004; Menzlyet al., 2004) were used to examine the relationship between
stock prices, dividends, output and consumption. They conducted their study in 29 major
markets in the world. The results of the study showed that there is the existence of a longrun co integrating relationship between stock prices, dividends, Output and consumption.
Gupta and Reid, (2013) examined the sensitivity of macro- economic surprises
(Monetary policy and macro-economic news) and stock return in the South African
context. Ten stock market indices are considered as the dependant variables throughout the
paper. The South African All Share (ALSI) and top 40 (TOP40) are more general indices,

and the other eight are industry-specific indices. They are mining (MIN),financials (FIN),
financials and industries (FIN_IND), general industrials (GEN_IND), gold mining
(GOLD), basic industrials (IND), resources (RES) and retailers index (RETAIL) and the
study was conducted during the period May 2002to January 2011. In their study, they used
Bernanke and Kuttner (2005) approach to measure the sensitivity of stock returns to
monetary policy and macroeconomic news and 352 observations were included in the
study. They concluded from their study that with the exception of the gold mining index,
where the CPI surprise plays a significant role, monetary surprise is the only variable that
consistently negatively affects the stock returns significantly, both at the aggregate and
sectoral levels and the PPI, CPI and REPO surprises have the largest effect on the stock
returns, followed by the CA and GDP surprises.
Adams, McQueen and Wood, (2004) examined the impact of Inflation news on high
frequency stock returns. In their study, they included Producer Price Index (PPI) and
Consumer Price Index (CPI) announcements as indicators affecting stock return. They
used the data compiled by the Money Market Services International (MMS) and part of the
Standard & Poors division of the McGraw-Hill Company to form the measures of the
markets expectation of inflation announcements. They used W the surveys median
response as their measure of expected inflation. Discounted cash flow model was used in
their research to measure the portfolio stock return. They showed that there is a strong
negative correlation between stock returns and inflation surprises and unexpected increases
in both the PPI and the CPI cause stock prices to fall.
Thorbecke and Coppock, (1996) examined the response of stock return to monetary
policy shocks and other macro economic variables during the period September1974September 1979 and October1982-October1987 in New York. They used monetary policy
using innovations in both Federal Fund rate and in Non-borrowed reserves as macroeconomic factors in their study and 10 Value Weighted Common Stock Portfolios based on
Market Capitalization were taken as samples and they were listed on New York Stock
Exchange. They applied Vector Auto regression that included lagged vales of GDP, GDP
Deflator, and Index of commodity prices, Fund rate, Non-borrowed reserves and Total
reserves for finding the impact on stock return in their study. They concluded that
unexpected changes in Federal Fund Rate(FRR) and Non- Borrowed reserves(NBR)
affects the stock return to a great extent. Unexpected tightening of monetary policy

produced a decline in stock return to a great extent. Average 32% of the variation in stock
return is explained by the macro-economic factors.
He, (2002) identified the major risk factors in the pricing of industrial stocks. His study
was confined to the six explanatory factors: The overall stock market, size, Book to
market equity ratio, the term structure, Default risk and unsecuritized real estate market.
Time series data was used in this study and research was conducted during the period of
January 1963-December 1997. The monthly return indices were used in the study and
Fama and Frenchs (1993) Five Factors Excess Stock Return model was employed to
establish a relationship between above mentioned factors (overall stock market, size, Book
to market equity ratio, the term structure, Default risk and unsecuritized real estate
market)and the return on stock indices and further F-Statistic was applied for testing the
regression relationship and to examine the inclusion of additional risk factors. Monthly
result in the study indicated that excess return of the industrial stock was very sensitive to
changes in unsecuritized real estate market proxied by market sales index of new houses
sold. The result showed that overall stock market factor is the most stable factor and the
real estate factor was 2nd most stable factor.
Olowe, (2007) examined the dynamic equilibrium relationship between a group of
macroeconomic variable and stock return and this study was conducted in Nigerian stock
market Index. Industrial production index, the consumer price index, money supply, oil
prices and Treasury bill rate were included as macro-economic variables. The study was
conducted from the last quarter of 1986 to the last quarter of 2004. Johansen's (1991)
vector error Correction model was applied for the study. The Nigerian Stock Exchange
Index (SR) was used as a proxy for stock prices. Co integration test was applied to
determine whether a group of non-stationary series is co integrated or not and unit root test
were also applied. The Augmented Dickey Fuller (1981) tests and the Phillips and Perron
(1988) tests were employed to determine the presence of a unit root. The results of the
study showed that a co integrating relationship exists among macro-economic variables.
The co integration relationship is consistent and exchange rate is negatively correlated
with stock price and Inflation, Money Supply, Oil prices and Interest rate has positively
correlated with stock prices.
Nishat, Shaheen and Hijazi, (2004) examined the relationship between Macroeconomic
Factors and the Pakistani Equity Market during the period 1973 to 2002 in Karachi Stock

Exchange Index. Output of stock market, inflation, money stock and interest rate,
Industrial Production Index, the Consumer Price Index, a narrowly defined money supply
and the money market rate in the interbank market were selected as Macroeconomic
Factors. Johansen's (1991 and 1995) vector error-correction model (VECM) was applied
for testing for co integration between integrated time-series and the standard Augmented
Dickey-Fuller test was applied to check the integration of the same order. For testing the
statistical causality between stock prices and the economy "Granger-causality" test was
applied which was proposed by C. J. Granger in 1969.From the results of the study they
found that these five variables are co integrated and two long-term equilibrium
relationships exist among these variables. Analysis of their results indicated that industrial
production is the largest positive determinant of Pakistani stock prices and inflation is the
largest negative determinant and industrial production is negatively correlated with the
stock indices.
Ludvigson and Ng, (2009) examined the role of macroeconomic factors in determining
the risk premium on Bonds with monthly data spanning the period January 1964December2003 and the observation contained in the study was zero-coupon U.S. Treasury
bond prices. Real output and income, employment and hours, real retail, manufacturing
and sales data, international trade, consumer spending, housing starts, inventories and
inventory sales ratios, orders and unfilled orders, compensation and labor costs, capacity
utilization measures, price indexes, interest rates and interest rate spreads, stock market
indicators, and foreign exchange measure were considered as macroeconomic factors and
Dynamic factor analysis was used to investigate possible empirical linkages between
forecastable variation in excess bond returns and macroeconomic factors. From their study,
they found that there was presence of strong predictable variation in excess bond returns
which was associated with macroeconomic factors. These factors were having substantial
predictive power independent not likewise other factors. The predictive power of the
estimated factors was not just statistically significant but also economically important,
with factors explaining between 21% and 26% of one-year-ahead excess bond returns. The
factors also exhibited stable and strongly statistically significant out-of-sample forecasting
power for future returns. The main predictor variables are factors based on real activity
that were highly correlated with measures of output and employment, but two inflation
factors and a stock market factor also contained information about future bond returns.

Chancharoenchai, Dibooglu, and Mathur (2005) analyzed the relationship between

domestic macroeconomic variables and stock excess returns to evaluate the effects of
macroeconomic variables on excess returns prior to the 1997 Asian crisis and this study
was based upon the Southeast Asian economies. Thailand (Stock Exchange of Thailand),
the Philippines (Philippine Stock Exchange), Indonesia (Jakarta Stock Exchange),
Malaysia (Kuala Lumpur Stock Exchange), Korea (Korean Compos ite Index), and Taiwan
(Taiwan Stock Exchange) were included in their study as the samples of the study and this
study was conducted during the period January 1987 to December 1996 and National
interest rates on treasury bills and government bonds, the consumer price index (CPI), the
narrow money supply (Ml), and the real GDP, were used as proxies for the risk-free rate of
return. The generalized ARCH model, as introduced by Bollerslev (1986) and BHHH
algorithm was applied by them for their study. The results of their study showed that the
volatility in these countries' stock markets, the monthly stock excess returns can best be
specified by the process of conditional heteroskedasticity, except for Malaysia, before the
financial crisis. Specifically, the monthly stock excess returns volatility on the Korean
exchange is characterized as the GARCH (1, 1)-M process for both sample periods,
whereas other markets are modeled by the GARCH (1, 1) process and various AR
processes. In the Indonesian exchange, for instance, the interest rate appears to have had a
statistically significant impact on the conditional mean, and the interest rate and January
dummy have explanatory power for time-varying volatility before the Asian crisis and
there is strong evidence of the significant impact of inflation uncertainty on monthly stock
excess returns or on their time-varying variance and there is strong evidence of the
significant impact of inflation uncertainty on monthly stock excess returns or on their timevarying variance.
Muradoglu, Taskin and Bigan, ( 2000) examined the Causality between Stock Returns
and Macroeconomic Variables in Emerging Markets during the time period of 1976 1997
and nineteen emerging markets were included in their study. Stock returns (R), exchange
rates (FX), and interest rates (I) are assumed to be linear in a set of local and global
information variables, whereas inflation (INF) and industrial production (PROD) are
assumed to be linear in a set of local information variables only. The global information
variable is the return on the Standard-&-Poors 500 index (S&P), which represents the
world market portfolio, and controls for the degree of market liberalization were
considered as macro economic factors considering the stock indices return. In order to

establish the causal ordering, Granger causality tests were employed in the study. The
findings of the study showed that out of nineteen emerging markets, only twelve exhibit
any type of causal relationship with stock returns. In Argentina, interest rates and inflation
cause stock returns; and, at the same time, stock returns cause interest rates and inflation
and In Mexico, foreign exchange rates and U.S. returns cause stock re turns, and stock
returns cause interest rates, foreign exchange rates, and industrial production and eight
countries besides Argentina and Mexico, they observed unidirectional causality from U.S.
returns, and macroeconomic variables to stock returns. The results of the study have shown
that the two-way interaction between stock returns and macroeconomic variables is mainly
due to the size of the stock markets, and their integration with the world markets, through
various measures of financial liberalization.
Sohail and Hussain, (2009) examined the long-run and short-run relationships between
Lahore Stock Exchange and macroeconomic variables during the time period of December
2002 to June 2008 and this study was conducted in the Pakistani context.The included
variables in this study were consumer price index, real effective exchange rate, three
month treasury bills rate, industrial production index, money supply, and LSE25 index
(Lahore Stock Exchange). Co integration test and vector error correction model was used
to identify equilibrium or a long-run relationship among the variables and Augmented
Dickey Fuller test (Dickey and Fuller, 1981), Phillips Perron test (Phillips and Perron,
1988) and KPSS (Kwiatkowski, Phillips, Schmidt and Shin, 1992) unit root tests were
applied to test the stationarity of variables. The results of the study have shown that two
long-run relationships were found between macro economic variables and LSE25 Index. In
the long-run, inflation had a negative impact on stock prices while Industrial production
index, real affective exchange rate, and Money supply affected stock returns positively.
However, three month Treasury bills rate showed the insignificant positive impact on stock
returns in the long-run. The results of Variance Decomposition illustrated that among the
macroeconomic variables, inflation was explaining the maximum variance.
Machado, Congregado, Golpe and Vega, (2011) investigated the relationship between
macroeconomic variables and stock market returns in the Spanish market. In this study,
they examined the long-run relationship between stock and bond markets returns over the
period from 1991 to 2009.They used Bai and Perron's multiple structural change approach
for finding the long-run relationship between stock and bond markets returns of the
Spanish market. findings of the study indicated that market risk premium is usually

positive, periods with negative values appear only in three periods (1991:1-1993:2,
1998:3-2002:2 and from 2007:1-2009:11) leading to changes in the GDP evolution and
study showed the presence of structural breaks in the Spanish market risk premium and its
relationship with business cycle and financial markets and the impact of the
macroeconomic variables such as GDP on the stock and bond return.
Jiranyakul, (2009) examined the relationship between stock market index and Macroeconomic variables in Thailand. GDP, the consumer price index (price level), narrow
money supply (M1), and nominal effective exchange rate(NEER) were included as
macroeconomic variables during the time period of first quarter of 1993 to the fourth
quarter of 2007 and the price level series are adjusted to the base period of 1998. DickeyFuller (DF) and Augmented Dickey-Fuller (ADF) tests were applied for testing the unit
root of the variables and the two-step Engle and Granger (EG) co integration test was also
applied. The results of the study explained that the estimated coefficient of international oil
prices is insignificant and this variable was not included in the model and all variable were
integrated of order one and words, they were non-stationary at the level, but were
stationary in first difference. The results of the study explained that there was no existence
of long-run relationship between the stock market Index (or stock prices) and the four
macroeconomic factors: real GDP (LY), money supply (LM1), nominal effective exchange
rate (LEX), and price level (LCPI). Real GDP, nominal Effective exchange rate and money
supply positively influenced stock market index while the Price level negatively influenced
the stock market index and The stock market index (LP) was positively related to real
GDP, narrow money supply (M1), and nominal effective exchange rate (EX). It was
negatively related to the price level (CPI), but the coefficient was not significant.
Sharma and Mahendru, (2010) examined the impact of macroeconomic variables on
stock prices in India and study was focused on four major macro economic variables
which were Gold price, foreign exchange reserves, exchange rate and Inflation. In their
study, they explained the relationship between BSE prices (as dependent Variable) and
macro variables (as independent variables) and this study was conducted during the time
period of Jan 2008 to Jan 2009. Multiple Regression Model was employed to test for the
effects of macroeconomic factors on stock return. The results of the study revealed that
exchange rate, and gold price to affect the entire BSE Stock price. There was 88.9%
correlation of exchange rate with stock price and gold price has90.2% correlation with
stock price. Independent variables except inflation rate and Foreign exchange reserve has a

significant relation with stock price and Exchange rate and gold price seem to affect the
entire stock price while inflation rate is significant for only three of the twelve portfolios.
Chen, Roll and Ross, (1986) examined the relationship between economic forces and
stock market using factor model during the period January 1953 to November 1983. In
their study, Inflation, Treasury bill rate, long term government bonds, low grade bonds,
industrial production, equally weighted equities, value weighted equities, consumption, oil
prices, monthly growth industrial production, annual growth industrial production,
expected inflation, unexpected inflation, real interest (ex post), risk premium and term
structure were included as variables of economic forces and concluded that several
economic variables were significant in explaining expected stock return likewise IP,
change in risk premium, changes in yield curve, measure of unanticipated inflation and
changes in expected inflation were highly volatile in explaining stock return.
Gao, Song and Wang (2008) tested the rational-expectations hypothesis using data from
the Chinesestock market by using discrete or limited independent-variable model
andEconometric model developed by Muth (1961) in China during the period April 20
2001, to August 28 2002, and the study was applied on Shanghai Exchange Composite
Index. In their study, Market index and index return were included as variables. Their
empirical results rejected the REH (rational-expectations hypothesis) and shows that in
Chinas stock market survey forecasts are overly optimistic, especially with positive
information, and can be improved slightly using past information.
Sajid, Hassan, Ahmad and Anwar, (2014) investigated the Impact of political events on
stock Market returns in Pakistani Stock Market during the time period of May 1999 to
December 2011 using the mean-adjusted return model and event study methodology and
by comparing the market efficiency between the two government styles, i.e. autocratic and
democratic and study was applied on Karachi Stock Exchange (KSE) returns and political
events from May 1999 to December 2011 was included as major macroeconomic variable
and they concluded that KSE was relatively inefficient and it was taking almost 15 days
to come to its original position and The market did not respond to all political events and it
can be assumed that these events were lesser important.
Kumar and Gupta, (2009)evaluated the return generating process for the Indian stock
market by using General multi-factor model and the Fama-French three-factor model
during the period August1990 to March 2006 and S&P CNX 500 companies were included

as samples and Bombay Stock Exchange (BSE, India) as market index and Market factor,
Market equity (ME) and BE/ME ratio were included as variables in their study and the
study revealed that Pearsons correlation between market and SMB and SMB and HML is
significant at 1% level. Whereas, the correlation between Market and HML is significant at
5% level and there was a strong size and value effects in Indian stock market and the
difference between the mean returns for small and big size stocks (SMB) is about 11% on
anannualized basis and the Fama -French three-factor model explained the cross section of
average stock returns that is missed by single Index model.
Ahmed, (2008) investigated the causal relationships between stock prices and the key
macro economic variables representing real and financial sector of the Indian economy
during the period March 1995 to March 2007 and quarterly data was used by him and the
index of industrial production, exports, foreign direct investment, money supply, Exchange
rate, interest rate, NSE Nifty and BSE Sensex in India were included as variables in his
study. He applied Johansen`s approach of co integration and Toda and Yamamoto Granger
causality test was applied to explore the long-run relationships and BVAR modeling for
variance decomposition and impulse response functions was applied for examining short
run relationships. The study revealed that there was the presence of a long run relationship
between stock prices and FDI, stock prices and MS and stock prices and IIP and movement
in stock prices causes movement in IIP and growth rate of real sector was factored due to
the movement of stock prices and the results also showed that FDI does cause movement
in stock prices while movement in stock prices does not have significant effect on FDI.
Sharma, Singh and Singh, (2011) investigated the relationship between Macroeconomic
variables and economic performance during the time period 2002 to 2009 and GDP (Gross
Domestic Product), GNI (Gross National Income), wholesale price index (WPI), consumer
price index (CPI), exchange rates, bank rates and balance of payments were included as
macro economic variables and Grangers causality with the Vector Auto Regression (VAR)
Model was applied for finding the relationship. Further Variance Decomposition Analysis
was applied finally quantify the extent up to which the three indices are influenced by each
other. The results of the study showed that Granger model and VAR model indicates that
CPI, WPI and Exchange do not have any influence on each other in the case of both of the
countries but the Variance decomposition model shows visible impact of macroeconomic
variables on each other.

Osisanwa and Atanda (2012) analyzed the variables of the stock market returns in
Nigeria by employing the OLS techniques using annual data for the period between 1984
and 2010. Their variables were consumer price index, exchange rate, broad money, interest
rate and real per capital income. The result of the study showed that exchange rate, interest
rate, money supply and previous stock return levels are the primary determinants of stock
returns in Nigeria. Further they concluded that the method used for the analysis is not
popular and widely used. In time series analysis, the ordinary least squares regression
results might provide a spurious regression if the time series are non-stationary. Again,
consumer price index is not accurate index for inflation; this is because the index takes the
price of fixed representative basket and does not consider the price of investment.
Ray and Sarkar (2014) examined the dynamic relationship between the Indian stock
market and the macroeconomic variables. In their study, they included money supply, 91day Treasury bills, long-term Government bonds, exchange rate, industrial production, and
wholesale price index as their variables by using quarterly data over the period from
1991:01 to 2008:04. They employed the Johansen co integration test, Vector error
correction model and the innovation analysis. Their found that the long-run stock market
was positively related to exchange rate and output and negatively related to short-term and
long-term interest rate, inflation and money supply. The results of the innovation analysis
and causality explained that the Indian stock market influences the industrial activities and
the market is expected to be more sensitive to the shocks of market.
Subburayan and Srinivasan (2014) investigated the effects of macroeconomic indicators
on CNX Bankex return in the Indian stock market by using monthly data for the period
from 1st January, 2004 to 31st December, 2013. They used interest rate, inflation and
exchange rate as the key indicators of the study. They employed Augmented Dickey-Fuller,
Co integration test, Granger causality test and Regression. They found that interest rate and
exchange has significant positive influence on the bank stock returns and there is no causal
relationship between interest rate and CNX Bankex, inflation and CNX Bankex. Butthere
is unidirectional causal relations between Bank stock and exchange rate.
Mutuku

and

Ngeny

(2015)

investigated

the

dynamic

relationship

between

macroeconomic variables and the stock prices in Kenya by using quarterly data ranging
from 1997 to 2010.They applied Vector Autoregressive Model and Vector error correction
model for their analysis and they used consumer price index, nominal gross domestic

product, and nominal exchange rate and Treasury bond rate as their variables. They found
that there is a positive relationship between the stock price and the nominal gross domestic
product, nominal exchange rate, and the Treasury bill rate. However, there is a negative
relationship between the stock prices and consumer price index in their study.
Literatures Summary: All the studies relating to this topic cannot be reviewed and
studied thats why we have included the studies and articles of famous researchers
included in the review of literature part which are beneficial and helpful for understanding
my topic in a better way. All the studies have their own objectives and study criteria, some
of them are studying employment effect on Indian economy while some are studying its
impact on Indian share market and every article is having own variables which are differ
researcher by researcher. In a review of the literature, we analyzed many researchers
findings on the impact of macroeconomic variables on the stock return. There are various
researchers like Erbaykal, Okuyan and Kadioglu (2008), Coleman and Tettey, (2008),
Olowe, (2011), Thorbecke and Coppock, (1996), Nishat, Shaheen and Hijazi, (2004),
Ludvigson and Ng, (2009), Black, Macmillan and Macmillan, (2015), Chancharoenchai,
Dibooglu, and Mathur, (2005), Muradoglu, Taskin and Bigan, (2000), Sharma and
Mahendru, (2010), Chen, Roll and Ross, (1986) and Ahmed, (2008) who reported the
positive relationship between stock return and macroeconomic variables and majority of
variables included in studies are inflation, output, private consumption, oil prices, interest
rate, gold prices, FDI, GDP, industrial production, dividend and treasury bill rates.
Moreover, Adams, Liow and Huang, (2006), Jiranyakul, (2009), Mcqueen and wood
(2004) who reported the negative relationship between stock return and macroeconomic
variables .He (2007) reported that excess return is very sensitive witha unsecuritized real
estate market and Ramcharan and Kim (2008) reported that the liberalization has reduced
the risk factor.
Some of the articles and researches which are included in my study include the factors
other than my study, but these articles are studied to know the study pattern, their way of
research and area and limitations of the study so that these studies can help us in
accomplishing my research in a proper way and these studies will be beneficial in deciding
the factors responsible for the movement of stock market. From the existing literature,
causal relationship reveals between stock market and macro economic variables. Many
researchers investigated the impact of macroeconomic variables on single stock market.
But in our study, we will include the important stock markets. This study will add to the

existing literature by providing robust result, which is based on more than one technique,
about causal relationship between stock market and macroeconomic variables for longer
period.

3
RESEARCH METHODOLOGY
Research Gap:
From the existing review of literature, Impact of macroeconomic variables on Stock return
seems to be unclear; furthermore, there is a dearth of studies in the Indian context and
various macroeconomic indicators were also not grossly researched. Moreover, there is
not any study comparing the effect of macroeconomic variable on the different stock
market return of an economy.

Research Objectives:
The overall objective of the study is to understand the relationship between selected
Macroeconomic variables with the stock returns in India, S&P CNX Nifty and (BSE
Sensex) However, the following are the specific objectives for the study:
To study the trend of macroeconomic variables in India.
To study the impact of macroeconomic variables on stock market in India.

Sample and Data Base:

After reviewing the entire literature, we selected NSE (National Stock Exchange) and BSE
(Bombay Stock Exchange) as stock index variables in my study and the variables included
in my study are:
Inflation Rate
Exchange Rate

 Foreign exchange reserves

Balance of Trade
Interest Rate
The study is performed on a monthly data for a period of 9 years from April 2008 to March
2016 totalling 96 months for each variable.The data used in this study consist of the
monthly closing prices of (BSE Sensex) and S&P CNX Nifty. We have taken the exchange
rate of Indian rupee and US dollar as USD/INR. The data used in the study is divided into
two sub-groups. First data set consists of stock data (BSE Sensex) and second data set
consists of macroeconomic factors such as inflation rate, foreign exchange reserve,
exchange rate, interest rate and trade balances. We have collected the data of all variables
from RBI official website and for stock index; we have downloaded the data from NSE
and BSE official websites in CSV format.

Statistical Tools of the Study:

While applying parametric test, we have to check the various assumptions otherwise the
results of the study are likely to be inaccurate. Therefore, it is very important to apply these
assumptions in my study and these are the following assumptions:
1. Our data should be normally distributed.
2. There should be homogeneity of variance.
3. The data of each variable should be independent. It means that one variable does not
influence the behaviour of another.

Normality Test:
This test tells us whether our data is normally distributed or not. However, we know from
the central limit theorem that if the sample data are approximately normal then the sample
distribution should be also. If our data is not normal, we have to transform the data by
using

log

transformation,

the

square

root

transformation

and

reciprocal

transformation.

Homogeneity of variance:
This assumption means that as we go through levels of one variable, the variable of the
other should not change. We test the homogeneity of variance by using Levens test. This
test tests the null hypothesis that the variances in different groups are equal.

Auto correlation:
Correlation is the relationship between two or more variables. These variables could be
related in three ways: positively, not related or negatively related. For this, we have to
measure covariance and correlation coefficient. There are several tests for correlation like
persons correlation coefficient and Spearmans correlation coefficient.

Descriptive Statistics:
It deals with the presentation of numerical facts, or data, in either tables or graphs form,
and with the methodology of analyzing the data or a set of brief descriptive coefficients
that summarizes a given data set, which can either be a representation of the entire
population or a sample. The measures used to describe the data set are measures of central
tendency and measures of variability or dispersion. Some measures that are commonly
used to describe a data set are measures of central tendency and measures of variability
or dispersion. Measures of central tendency include the mean, median and mode, while
measures of variability include the standard deviation (or variance), the minimum and
maximum value of variables and kurtosis and skewness.
Descriptive Statistics are used to present quantitative descriptions in a manageable form. In
a research study we may have lots of measures. Or we may measure a large number of
people on any measure. Descriptive statistics help us to simplify large amounts of data in a
sensible way. Each descriptive statistic reduces lots of data into a simpler summary
Skewness: The skewness is an abstract quantity which shows how data piled-up. A
number of measures have been suggested to determine the skewness of a given
distribution. If the longer tail is on the right, we say that it is skewed to the right, and the
coefficient of skewness is positive.
Kurtosis: Kurtosis is a descriptor of the shape of a probability distribution and, just as for
skewness, there are different ways of quantifying it for a theoretical distribution and
corresponding ways of estimating it from a sample from a population. Depending on the

particular measure of kurtosis that is used, there are various interpretations of kurtosis, and
of how particular measures should be interpreted.
Standard Deviation: Standard deviation is a measure of the dispersion of a set of data
from its mean. The more spread apart the data, the higher the deviation. Standard deviation
is calculated as the square root of the variance.

Zero order correlation:

A correlation of zero order means there is no relationship between the two variables.
Correlation is a measure of association between two variables. The variables are not
designated as dependent variable or independent variable. The value of a correlation
coefficient can vary from minus one to plus one. A minus one indicates a perfect negative
correlation, while a plus one indicates a perfect positive correlation.
A zero order correlation means there is no relationship between the two variables. When
there is a negative correlation between two variables, as the value of one variable
increases, the value of the other variable decreases, and vice versa. In other words, for a
negative correlation, the variables work opposite each other. When there is a positive
correlation between two variables, as the value of one variable increases, the value of the
other variable also increases. The two most popular correlation coefficients are:
Spearman's correlation coefficient rho and Pearson's product-moment correlation
coefficient.

Multiple Regression Analysis:

Multiple linear regression is a statistical technique that uses several explanatory variables
to predict the outcome of a response variable. The goal of multiple linear regression is to
find the relationship between the explanatory and response variables. Multiple-regression
is a logical extension in which there are several predictors or indicators.

The Granger Test:

Although regression analysis deals with the dependence of one variable on other variables,
it does not necessarily imply causation. In fact, the question that arises is whether
statistically one can detect the direction of causality (cause and effect relationship) when
temporally there is a lead-lag relationship between two variables. Without going too deeply

into this question, we have only considered a relatively simple test of causality, that
proposed by Granger21. This test assumes that the information relevant to the prediction of
the respective variables is contained solely in the time series data on these variables. The
intuition behind the Granger causality test is quite straight forward. Suppose X variable
causes Y but Y does not Granger cause X, then past values of X should be able to predict
future values of Y, but past values of Y should not be helpful in forecast of X. Consider the
following model in which X and Y are expressed as deviation of respective means.

Where, it is assumed that the disturbances 1t and 2t are uncorrelated. The null hypothesis
isH0 = 0, that is, lagged X terms do not belong in the regression. To test this
hypothesis, we apply the F test with m and (n k) degrees of freedom.
We reject the null hypothesis when the lagged X terms belong in the regression. This is
another way of saying that X causes Y. Similarly we can test the model (1.2), that is,
whether Y causes X. However, before proceeding to applications of the Granger test, one
must keep in mind that the number of lagged terms to be included in regression like (1.1)