Stock Return, Growth and Inflation in India: Analysis of Stochastic Seasonality, Impulse Response and Multivariate GARCH

Abstract

This study analyses the empirical interdependence among asset returns, industrial growth and inflation after controlling for interest rate by considering stochastic seasonality and conditional volatility with monthly time series in India. The HEGY unit root test suggests that industrial growth and inflation experience only stochastic trend and no persistent stochastic behaviour at any other seasonal frequencies, while stock return follows persistent seasonal trend. The study observes that causality goes from stock return to industrial growth, although the extent of causality is very low, but not the other way round. This finding has significant policy implications particularly in the context of financial sector reforms in India. Inflation has negative impact on stock returns, while the innovations in stock returns have not transmitted to inflation.