The Determinants of Stock Prices: New Evidence from the Indian Banking Sector

We examine the determinants of stock prices for major Indian banks using panel data modeling techniques. Our work is novel because, for the first time in the literature on Indian banking, we use a panel Granger causality test that reveals the direction and sign of causality. We find evidence of panel cointegration among stock prices, economic activity, interest rates, and exchange rates for thirteen banks. Our results suggest that while economic activity and currency depreciation contribute to a rise in share prices, an increase in the interest rate reduces bank share prices. Moreover, only economic activity Granger-causes stock prices in the long run.