Causal Relationships of the Stock Market with other Asset Classes: An Indian Perspective

ABSTRACT

The recent decade has seen a rapid rise in risk assets. Stocks, commodities, and cryptocurrencies have exploded to the upside. Global central banks have maintained interest rates at record low levels following the COVID-19 crisis. This has further acted as tailwinds for risky assets. With asset classes being increasingly interlinked with each other, useful information can be gained by studying these inter-relationships. This paper looks at the interrelationships between the Indian stock market Nifty index and some key asset classes such as Gold, Crude oil, short-term and long-term Indian government bond yields, the USD/INR exchange rate, and the cryptocurrency Bitcoin for the period January 2011 to December 2020. Co-integration analysis suggests the absence of long-run relationships between the Nifty and the asset classes studied. Granger causality analysis reveals bi-directional causality between Nifty and USD/INR and Crude oil returns. Gold returns, Bitcoin returns, and changes in short and long-term government bond yields uni-directionally granger-caused Nifty returns. Impulse response analysis reveals that shocks in each of the independent variables caused a shock in the Nifty that persisted for 1 to 3 weeks. Traders in the Nifty can monitor these shocks and accordingly fine-tune their strategies for possible moves in the Nifty. © 2022 ACM.