Abstract:
This paper aims to examine the relationship between gross domestic product and Indian stock market from a sectoral perspective by using quarterly time series data from 2003:Q4 to 2014:Q4. Ng-Perron unit root test is utilized to check the order of integration of the variables. The long run relationship is examined by implementing the ARDL bounds testing approach to co-integration. VECM method is used to test the short and long run causality and variance decomposition is used to predict long run exogenous shocks of the variables. The results of the ARDL bounds test confirm the existence of a cointegrating relationship between sectoral GDP and sectoral stock price in India. The results from long-run and short-run coefficient reveals that sectoral price indices are significantly influenced by changes in the respective sectoral GDP in the long-run, whereas, crude oil price is an important factor influencing the sectoral prices in the short-run. The granger causality test demonstrates a unidirectional short-run causality running from manufacturing sector GDP to aggregate stock price index of manufacturing sector. Further, the short-run causality running from electricity, gas and water supply sector GDP to respective sector stock price index. However, unidirectional short-run causality is absent in the service secto