Influence of macroeconomic variables on stock markets: The cases of China and India

Abstract

The topic of this study was the relationships between macroeconomic variables and stock markets in the two largest developing countries. The aim was to identify any potential short-term and long-term influence of economic indi- cators on stock indices’ returns. The authors attempted to capture the effects on the quarterly stock price indices’ returns from Q1 2003 to Q3 2018 of the following macroeconomic variables: the interest discount rates, monetary aggregate, unemployment rate, GDP, manufacturing index, CPI and debt. China and India, which are rarely cited but no less interesting regions, were selected. The vector error correction model (VECM) was chosen to identify any long-term cointegration among the variables. The vector autoregressive (VAR) stochastic model was processed for any short-term relationship. To summarise, for both the Chinese and the Indian market, long-term cointegration was concluded. The short-term parts of the VEC models had more or less comparable results to the VAR models – particularly the GDP, indebtedness and monetary aggregates generally have a positive impact on the stock markets, whilst inflation in China makes stock markets more volatile. Unlike the developed markets studied in earlier authors’ papers, both the models confirmed the possibility of predicting the stock market in India and China using the above- mentioned regressors.