The Effect of Macroeconomic Factors on Asset Prices: A Time-Series Approach

Abstract

This study examines the relationship between macroeconomic factors and asset prices in India using a time-series approach. By focusing on key economic indicators such as inflation, interest rates, GDP growth, and exchange rates, the paper aims to understand how these variables influence the performance of assets traded on the National Stock Exchange (NSE). Utilizing secondary data from June 2023 to May 2024, sourced from the Reserve Bank of India (RBI) and NSE, the study employs econometric tools such as Vector AutoRegression (VAR), Granger Causality, and Cointegration tests to explore both short- and long-term dynamics. Previous literature highlights mixed results, with some studies suggesting a strong link between macroeconomic variables and asset prices, while others find limited effects. By identifying a research gap in the Indian market, this paper contributes to the ongoing debate and provides insights for investors, policymakers, and financial analysts. VAR model shows that inflation and lagged values of the Nifty 50 Index are strong predictors of short-term asset price movements, while the impact of interest rates and exchange rates is less significant.   Inflation Granger causes the Nifty 50 Index and indicating that inflation can predict future movements in asset prices. GDP Growth Granger causes the Nifty 50 Index showing that economic growth also plays a role in predicting asset prices. There is no reverse causality from the Nifty 50 Index to inflation, GDP growth, or interest rates, indicating that asset prices do not significantly predict these macroeconomic variables in the short term.