An Empirical Analysis Of The Impact Of Macroeconomic Variables On Stock Market Volatility In India

Abstract

Nowadays, the financial market is vital in assessing a nation’s economic health. The relationship between stock market and macroeconomic variables has long been a subject of debate in both developed and developing countries. The central goal of this investigation is to empirically examine the impact of macroeconomic variables on stock price volatility in the Indian stock market, using the auto-regressive distributed lag model (ARDL) for cointegration testing and the error correction term (ECM) for short-run dynamics. The data spans from 1991 to 2021 on an annual basis and includes macroeconomic variables such as exchange rates, GDP growth rates, inflation rates, oil prices, and unemployment rates. The study utilizes the BSE-100 index as a proxy for stock prices and obtains secondary data from the BSE Stock Market, World Bank Indicators Statistical Data, and Reserve Bank of India (RBI) Bulletin. The results indicate that macroeconomic variables significantly affect stock price volatility in both the long run and short run. Specifically, the inflation rate and oil prices exhibit a negative effect on stock prices, although the coefficients are statistically insignificant at the 5% level. Conversely, exchange rates, GDP, and unemployment rates positively influence stock price volatility in the long run, with statistically significant coefficients at the 5% level. Additionally, in the short run, unemployment rates negatively impact stock price volatility. The study recommends implementing deflationary fiscal policies and stabilizing exchange rates to create a better financial environment and promote economic stability in India.