Economic Sentiment and Market Return of Indian Stock Market: An ARDL Approach

This study investigates the relationship between economic sentiment and the return of the BSE S&P 500 Index over a decade, employing an autoregressive distributed lag (ARDL) model. Using 12 macroeconomic variables as proxies for economic sentiment, the analysis reveals a high degree of correlation between these proxies and market return. The findings demonstrate that market return is significantly influenced by its own lags, economic corporate premium (ECORPREM), foreign direct investment (FDI), gross domestic product (GDP), inflation rate (INFLAT), prime lending rate (PLR), and short-term interest rate (SHORTINT). Specifically, market return shows both positive and negative correlations with its various lags, while ECORPREM, FDI, GDP, and SHORTINT exhibit significant relationships with market return at different lag intervals. Additionally, INFLAT positively influences market return at specific lags, and PLR is positively correlated with market return in the current period. The study identifies that ECORPREM, FDI, GDP, INFLAT, PLR, and SHORTINT, with -values below 0.20, are statistically relevant in explaining market return. Conversely, variables such as exchange rate (EXRATE), foreign exchange reserves (FEXRES), index of industrial production (IIP), liquidity in the economy (LIQECO), oil prices (OILPRICE), and terms of trade premium (TERMSPRE) do not significantly impact market return, as indicated by their higher -values. These results provide valuable insights for retail investors, policymakers, and other stakeholders in refining their decision-making processes in the Indian stock market. The study also challenges the classical finance theory of investor rationality, suggesting avenues for further research in international contexts.