Behaviour of Stock Price and Macroeconomic Indicators: An Application of EGARCH

The manoeuvre of the study was to anatomise the macroeconomic determinants that are responsible for variations in stock price in emerging stock markets of India. The relationship has been elicited exerting monthly data from April 2004 to March 2014. Sensex (i.e. BSE’s index) has considered as dependent variable and key macroeconomic variables of Indian economy, such as exchange rate, index of industrial production, inflation, foreign exchange reserve, gold price and money supply as explanatory variables. Furthermore, the Exponential Generalised Auto Regressive Conditional Heteroscedasticity model (EGARCH) has been exercised to measure the volatility registered by Sensex due to the variations in macroeconomic indicators. Consequently, the model was formulated by taking care of tests for unit root, clustering volatility, presence of ARCH effect. The empirical findings of the study bestow the evidences of the significant role of macroeconomic indicators in advocating the behaviour of stock prices in India. Money supply, exchange rate and the index of industrial production are determined as the key variables, which evoke the Indian stock market volatility.