Journal Press India^®

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This paper primarily studies the predictive ability of macroeconomic variables and financial ratios for Indian stock returns based on BSE SENSEX at the level of monthly data covering the period April 1996 to December 2018 using both in-sample and out-of-sample tests of predictive ability. Following this procedure, out of a total of 13 variables, this study found the following six macro variables viz., inflation rate, change in the nominal exchange rate, NASDAQ composite return, foreign direct investment and changes in long-term interest rate and the government fiscal deficit some of which has significant predictive ability for returns. Empirically results show both the inflation rate and change in the nominal exchange rate and the contemporaneous values of NASDAQ composite return and price-earnings ratio to have significant effects for returns on BSE SENSEX. Cointegration tests have also been carried out and found long-run statistical equilibrium among BSE SENSEX and the macro variables at level values.

Keywords

Predictive ability; Macroeconomic variables; Dynamic linear regression model

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