An Econometric Analysis of Linkages between Macroeconomic Variables and Stock Markets: Evidence from Asian Emerging Markets

The purpose of this paper is to investigate impact of macroeconomic variables on stock markets of India and Indonesia. This paper also attempts to identify linkages between markets and macroeconomic variables. The rationale behind selecting these countries for the present study is MSCI emerging markets index of Asia, which comprises emerging economies with huge return potential for prospective investors. This study will help investors and researchers to understand dynamics of linkages between markets and macroeconomic variables. Augmented Dickey-Fuller (ADF) unit root test is used to assess the stationary of time series, Johansen test co-integration is applied to examine long-term integration among variables, Granger causality test is used to examine the causality relationship between macroeconomic variables and stock returns. The monthly data are taken for the study which ranges from July 1997 to July 2017. Currency exchange rates, interest rates, money supply, and inflation are the macroeconomic variables for the current study. Results revealed that there is one co-integrating equation of long-run equilibrium between the variables for both countries. Granger causality test reveals that there exists unidirectional and bidirectional relationship between the variables.