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Indian Stock Price Determination: Fundamental Versus Bubble

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Book cover Functional Instability or Paradigm Shift?

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Abstract

The real economy variables are not leading the stock prices in the sense that stock returns cannot be predicted from the fundamental variable returns. There is however, one causality relationship running from stock return to money supply change; stock prices lead change in money supply in the sense that changes in money supply could be predicted from the change in stock market. This could perhaps be explained by the fact that an increase in stock price leads the central bank (RBI) to release some control over the money, so more money can freely move in the market. As a result money supply increases. So while flow from real sector to financial sector turns out to be quite weak, some flow from financial sector to real sector could be isolated for the Indian market over the study period. Along with the presence of volatility, the absence of explanatory power of fundamental variables in determining stock prices could indeed point towards vulnerability of Indian stock market in recent years.

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  1. School of Management & Sciences, West Bengal University of Technology, BF 142, Salt Lake Kolkata, West Bengal, India

    Amitava Sarkar

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Sarkar, A. (2012). Indian Stock Price Determination: Fundamental Versus Bubble. In: Functional Instability or Paradigm Shift?. Springer, India. https://doi.org/10.1007/978-81-322-0466-4_5

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