INTERRELATIONSHIP BETWEEN STOCK RETURNS AND SELECTED MACROECONOMIC VARIABLES: AN EMPIRICAL STUDY.

The Indian Capital Market is said to be affected by various macroeconomic variables. The main purpose of this paper is to investigate the relationship between stock returns and two macroeconomic variables i.e. Exchange Rate and FII (Foreign Institutional Investment). Composite Index CNX Nifty has been considered as a proxy of Indian Capital Market. Dickey-Fuller Unit Root Test is applied to check the data for stationarity, Johansen Co-integration test has also been conducted to check whether the variables under consideration are cointegrated. Data was found to be stationary at first difference and variables were found to be cointegrated with each other. Since the variables are cointegrated, Vector Error Correction Model (VECM) has been used instead of classical Granger-Causality method and the results indicate that Exchange Rate Granger cause FII and Nifty both, and also FII Granger causes Nifty. No further causality was found between other variables.