Causal Relationship between Stock Market and Exchange Rate, Foreign Exchange Reserves and Value of Trade Balance: a Case Study for India

This paper investigates the nature of the causal relationship between stock prices and macroeconomic aggregates in the foreign sector in India. By applying the techniques of unit–root tests, cointegration and the long–run Granger non–causality test recently proposed by Toda and Yamamoto (1995), we test the causal relationships between the BSE Sensitive Index and the three macroeconomic variables, viz., exchange rate, foreign exchange reserves and value of trade balance using monthly data for the period 1990-91 to 2000-01. The results suggest that there is no causal linkage between stock prices and the three variables under consideration. ________________________________________________________________________ JEL classification: G1, E4