Time Varying Macroeconomic Risk and Industry Stock Returns: Empirical Evidence from India

Abstract

This paper searches further evidence for the relation between  the time varying macroeconomic conditions and stock returns in India using monthly data during the post 2000 period. Unlike other research in the area, the study uses industry level stock price data on six sectors namely Banking, Energy, FMCG, Information Technology, Pharmaceuticals and Automobiles. Data availability and diverging business cycle sensitivity constitute the rationale behind the selection of industry groupings. Empirical methodology involves a multi-factor modeling using Generalized Auto Regressive conditional Heteroskedasticity (GARCH) model. The results of the study proved that the expected premium on stock market investments in India was time varying and has been affected by the time varying conditional volatilities of macroeconomic factors. The impact of economic changes found different across the industries and the sectoral variations in stock returns confirm the potentials of industry allocation for the diversification of investment risks.