LITERATURE REVIEW Mukherjee and Naka (1995) employed a vector error correction model (VECM) to examine the relationship

between stock market returns in Japan and a set of six macroeconomic variables such as exchange rate, inflation, money supply, industrial production index, the long-term government bond rate and call money rate. They found that the Japanese stock market was co integrated with these set of variables indicating a long-run equilibrium relationship between the stock market return and the selected macroeconomic variables. Wongbampo and Sharma (2002) explored the relationship between stock returns in 5-Asian countries viz. Malaysia, Indonesia, Philippines, Singapore and Thailand with the help of five macroeconomic variables such as GNP, inflation, money supply, interest rate, and exchange rate. Using monthly data for the period of 1985 to 1996, they found that, in the long run all the five stock price indexes were positively related to growth in output and negatively related to the aggregate price level. However, they found a negative relationship between stock prices and interest rate for Philippines, Singapore and Thailand, but positive relationship for Indonesia and Malaysia. Gunasekarage, Pisedtasalasai and Power (2004) examined the influence of

macroeconomic variables on stock market equity values in Sri Lanka, using the Colombo All Share price index to represent the stock market and the money supply, the treasury bill rate (as a measure of interest rates), the consumer price index (as a measure of inflation), and the exchange rate as macroeconomic variables. With monthly data for the 17-year period from January 1985 to December 2001 and employing the usual battery of tests, which included unit roots, cointegration, and VECM, they examined both long-run and short-run relationships between the stock market index and the economic variables. The VECM analysis provided support for the argument that the lagged values of macroeconomic variables such as the consumer price index, the money supply and the Treasury bill rate have a significant influence on the stock market. Gan et al. (2006) investigated the relationships between New Zealand stock market index and a set of seven macroeconomic variables from January 1990 to January 2003 using cointegration and Granger causality test. The analysis revealed a long run relationship between New Zealands stock market index and the macroeconomic variables tested. The Granger causality test results showed that the New Zealands stock index was not a leading indicator

for changes in macroeconomic variables. However, in general, their results indicated that New Zealand stock market was consistently determined by the interest rate, money supply and real GDP. Tan, Loh and Zainudin (2006) tested the dynamic nexus between macroeconomic variables and the Malaysian stock indices (Kuala Lumpur Composite Index) during the period of 19962005 and found that the inflation rate, industrial production, crude oil price and Treasury Bills rate have long-run relation with Malaysian stock market. Results indicate that consumer price index, industrial production index, crude oil price and treasury bills are significantly and negatively related to the Kuala Lumpur Composite Index in the long run, except industrial production index coupled with a positive coefficient. Ratanapakorn and Sharma (2007) examined the short-run and long run relationship between the US stock price index and macroeconomic variables using quarterly data for the period of 1975 to 1999. Employing Johansens co-integration technique and vector error correction model (VECM) they found that the stock prices positively relates to industrial production, inflation, money supply, short term interest rate and also with the exchange rate, but, negatively related to long term interest rate. Robert (2008) examined the effect of two macroeconomic variables (exchange rate and oil price) on stock market returns for four emerging economies, namely, Brazil, Russia, India and China using monthly data from March 1999 to June 2006. He affirmed that there was no significant relationship between present and past market returns with macroeconomic variables, suggesting that the markets of Brazil, Russia, India and China exhibit weak form of market efficiency. Furthermore, no significant relationship was found between respective exchange rate and oil price on the stock market index of the four countries studied. Mohammad, Hussain and Ali (2009) observe the affiliation between macroeconomics variables and Karachi Stock Exchange in Pakistan taking into consideration quarterly data of foreign exchange rate, foreign exchange reserve, gross fixed capital formation, money supply, interest rate, industrial production index and whole sales price index. The result shows that exchange rate and exchange reserve and highly influenced the stock prices.

Asaolu T.O. and Ogunmuyiwa M.S. (2010) studied the impacts of macroeconomic variables on share price of Nigeria considering average share price of the Nigerian Stock Exchange as dependent variable and External Debt, Inflation rate, Fiscal Deficit, Exchange

rate, Foreign Capital Inflow, Investment, Industrial output as independent variables. The findings of Granger Causality test indicated that Average Share Price (ASP) does not Granger cause any of the nine (9) macroeconomic variables in Nigeria in the sample period. Only exchange rate granger causes average share price when considered in pairs. The Johansen cointegration test showed a long run relationship between share price and the macroeconomic variables. Error correction method also showed a weak relationship between share price and macroeconomic variables which means stock price is not a leading indicator of macroeconomic variables in Nigeria. Pal and Mittal (2011) investigated the relationship between the Indian stock markets and macroeconomic variables using quarterly data for the period January 1995 to December 2008 with the Johansens co-integration framework. Their analysis revealed that there was a longrun relationship exists between the stock market index and set of macroeconomic variables. The results also showed that inflation and exchange rate have a significant impact on BSE Sensex but interest rate and gross domestic saving were insignificant. Ali M. B. (2011) examined the impact of changes in selected microeconomic and macroeconomic variables on stock returns at Dhaka Stock Exchange (DSE). A Multivariate Regression Model computed on Standard OLS Formula has been used to estimate the relationship. Regression results suggest that inflation and foreign remittance have negative influence and industrial production index; market P/Es and monthly percent average growth in market capitalization have positive influence on stock returns. Pramod Kumar Naik and Puja, IIT (2012) investigates the relationships between the Indian stock market index (BSE Sensex) and five macroeconomic variables, namely, industrial production index, wholesale price index, money supply, treasury bills rates and exchange rates over the period 1994:042011:06. Johansens co-integration and vector error correction model have been applied to explore the long-run equilibrium relationship between stock market index and macroeconomic variables. The analysis reveals that macroeconomic variables and the stock market index are co-integrated and, hence, a long-run equilibrium relationship exists between them. It is observed that the stock prices positively relate to the money supply and industrial production but negatively relate to inflation. The exchange rate and the short-term interest rate are found to be insignificant in determining stock prices.