A Study of Causal Relationship Between Foreign Investment Economic Growth Stock Market Volatility and Stock Market Returns in India

Abstract

Foreign investment is confirming long run relationship with the economic growth. In the long newlineterm, foreign equity, foreign debt, and foreign direct investment all are contributing to newlineeconomic growth. Foreign equity is more significant to the stock market volatility and newlinecontributing in stabilizing the stock market volatility. Economic growth, foreign investment is newlinecontributing in the stock market return and confirming the positive short and long run newlinerelationship. Stock market volatility is significant in short run to stock market returns and newlineconfirming the negative short run relationship. In the first model of the thesis, the study newlineinvestigated the causality between foreign investment and economic growth in India. To find newlineout the two way causation effectively, in the first chapter we have employed Granger Causality newlinetest and Vector Error Correction Model method. The testing time series data period is from newline1993 to 2016. Here, in this study we converted annual gross domestic product and foreign newlinedirect investment data into monthly figures. Foreign investment is a major factor to determine newlinevolatility in the stock market. In the second model of the thesis, to discover the influence on newlineStock Market volatility of foreign investment, we have considered FE, FD, and FDI as proxy newlinevariables of foreign investment and Indian stock market volatility is represented by Indian vix. newlineThe period for this study is 2009 to 2017. To address this issue of volatility in the long/shortrun newlinewe have applied the ARDL. The preference given to the ARDL model over Johansen cointegration newlineis to the difference in the OOI in the variables. ARDL model permits to combine newlinethe I (0) and I (1) series whereas I (1) required in the case of Johansen approach. Results of newlineunit root confirm I (0)/I (1) order of integration, which allows us to apply the ADRL bound newlinetest. F-statistics is higher than the UBCV at 10%, 5% and providing the evidence of cointegration newlineamong variables at a 5% level of significance. Hence, there is a long-run newlinerelationship amid the variables