Nonlinearity Between Economic Indicators and Indian Capital Market

Abstract

The current work adds to the present research by exploring the asymmetric impact of gold prices, interest rates, oil prices and the currency exchange movements in the Indian equity market. The study considers the monthly price of interest rate, crude oil, USD versus INR, BSE Sensex closing value and the prices of gold. A non-linear method promoted by Shin et al. (2014) is applied to 27 years of data from 1990 to 2018 to examine short-term and long-term asymmetrical relationships. The empirical outcome revealed that the variables analysed have an asymmetrical influence on the equity index. Positive shocks on crude oil prices affect the stock index negatively, while gold price changes tend to generate a favourable effect on the stock indices in a short interval yet suggest the adverse impact in the long-run. A positive short and long-term reaction on the equity indices is seen due to the negative move in currency exchange. The results are essentially significant due to the commodities’ volatility pattern that plays a determining role to value derivatives and hedging instruments. The asymmetric relation of explanatory variables with stock index offers a superior understanding of the risky environment, especially in emerging financial markets.