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Publication date: 10 February 2021

Megha Agarwalla, Tarak Nath Sahu and Shib Sankar Jana

This study aims to establish the dynamic relationship between international crude oil prices and Indian stock prices represented by the Bombay Stock Exchange (BSE) energy index.

Abstract

Purpose

This study aims to establish the dynamic relationship between international crude oil prices and Indian stock prices represented by the Bombay Stock Exchange (BSE) energy index.

Design/methodology/approach

Using Johansen’s cointegration test, vector error correction (VEC) model, impulse response function and variance decomposition test the study tries to ascertain the short-term and long-term dynamic association between the oil price shock and the movement of stock price and Granger causality test is applied to find out the nature of causality.

Findings

Considering vector autoregression estimation, the present study analyzes the relationship between the variables and tries to make a valid conclusion. The result of the co-integration test exhibits the presence of a long-term association between these two macro-economic variables during the period under study. Also, in the short-run VEC Granger causality result reveals that the movement of international crude oil price significantly influences the Indian stock price.

Research limitations/implications

To get a more robust result the study can be further extended by taking a longer time period with data of shorter time-frequency such as daily or weekly and further by using more sophisticated econometric and statistical tools. Further, the study can be extended to firm-level investigation considering the forward trading concentration with the Indian oil basket.

Social implications

In today’s globalized era, forecasting of share price movement helps investors in predicting the market and invest accordingly. Through this liquidity of the markets enhance and markets become more active in the global arena.

Originality/value

This study represents fresh findings in the changing time period the linkage between crude oil prices and stock prices which are of value to the academicians, researchers, policymakers, investors, market regulators, etc.

Details

Vilakshan - XIMB Journal of Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0973-1954

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