Abstract:
This project investigates the relationship between stock market prices and three macroeconomic variables which are inflation, exchange rate and interest rate in China and India. We employ monthly data on SSE Composite index as a proxy for China’s stock market, BSE Sensex as a proxy for India’s stock market, CPI as a proxy for inflation, China Yuan/USD and Indian Rupee/USD as proxies for exchange rates and deposit rate as a proxy for interest rate for the period from January 2009 to January 2019 in an unrestricted VAR model. The results indicate that there is a unidirectional causal relationship between stock prices and interest rate in China while in India, there is a bidirectional causal relationship between stock prices and exchange rate and a unidirectional causal relationship between stock prices and inflation. Inflation and interest rate are found to have a negative effect on stock prices while exchange rate is found to have a positive effect on them.
