Long-Run and Short-Run Causality between Stock Price and Gold Price: Evidence of VECM Analysis from India

Abstract

The prime objective of the study is to identify the long-run and short-run relationship between Indian stock price viz., BSE SENSEX (hereafter named as BSE) and gold price (GOLD) in India. The daily closing price data were collected for the period of ten years ranging from 1^st April 2004 to 31^st March 2014 with 2490 observations. The study employed two models: Model one used GOLD as dependent variable and BSE as independent variable and the other model is vice versa. First, the stationarity of the data is checked through Augmented Dickey Fuller test, and then Johansen cointegration test and Vector error correction model (VECM) are employed for analysis. Using Augmented Dickey Fuller test, it was found that the series are not stationary at level, but the same becomes stationary at first differencing. The results of Johansen cointegration test revealed that Indian stock market (SENSEX) is significantly and positively cointegrated with the gold price (GOLD) which leads the way to run the VECM. The results from the VECM (in model one) provides evidence for the existence of long-run relationship between BSE and GOLD, while there is no short run causal relationship running from BSE and GOLD. On the other hand, there is no long-run as well as short-run relationship between the two variables (in model two).