Purpose This study seeks to foster fresh and exhaustive empirical relational evidence on the dynamism among oil price ripples, inflationary shocks and stock price volatility in India considering the time varying model along with vector autoregressive specification. Design/methodology/approach The study uses a time series econometrics technique covering the monthly data from January, 2006 to June, 2022. For the long-run results, vector error correction model (VECM) and for causal relationship, Granger causality test have been applied. Moreover, for robustness variance decomposition analysis (VDA) and impulse response function (IRF) are used by the authors. Findings Using Johansen’s co-integration test and VECM, the study documents that, there exists a unidirectional long-run causality from oil price and stock price to inflation. Additionally, the Granger causality test reveals a short-run bidirectional causal association between oil price and stock price; however, inflation does not influence any of the variables. Moreover, the VDA documents strong endogeneity of stock prices and strong exogeneity of inflation. Though, IRF almost validates the VECM results. Practical implications By seeing the interaction of stock prices with oil and inflation, investors and portfolio managers can forecast the movement of price and can accordingly take the decision. Originality/value The study concludes that a hike in the oil prices and a boom in the stock price jointly reinforce the inflationary situation over a longer time span in this country. Thus, the vitality of crude prices in controlling inflation and gauging the business cycle to ensure greater stability still remains a matter of high concern.
Agarwalla et al. (Tue,) studied this question.