Analysis of the impact of central bank digital currency on stock markets: Dynamics and implications

The purpose of the paper is to select the right market proxy for calculating the expected return, since critically evaluating proxies or selecting the correct proxy market portfolio is essential for portfolio management because the change in the market portfolio proxy affects returns. In this study, monthly data of equity indices are evaluated to find out the better market proxy. The indices taken are BSE 30 (Sensex), Nifty 50, BSE 100, BSE 200, and BSE 500. The macroeconomic variables used in the study are industrial production index (IIP), consumer price index (CPI), money supply (M1), and exchange rate in India. To avoid the influence of COVID-19, the research period was from January 2013 to December 2019 to critically evaluate these proxies in order to find the most appropriate market proxy. This paper reveals a noteworthy relationship between stock market returns and macroeconomic factors, while suggesting that the BSE 500 is a better choice for all equity indices, as the index also shows a significant relationship with all macroeconomic variables. BSE500 is a composite index comprising all sectors with low, mid and large cap securities, therefore it reflects the impact of macroeconomic factors most efficiently, taking it as a market proxy. This study was carried out in the context of India and can be replicated for other countries.

The current empirical study attempts to analyze the impact of COVID-19 on the performance of the Indian stock market concerning two composite indices (BSE 500 and BSE Sensex) and eight sectoral indices of Bombay Stock Exchange (BSE) (Auto, Bankex, Consumer Durables, Capital Goods, Fast Moving Consumer Goods, Health Care, Information Technology, and Realty) of India, and compare the composite indices of India with three global indexes S&P 500, Nikkei 225, and FTSE 100. The daily data from January 2019 to May 2020 have been considered in this study. GLS regression has been applied to assess the impact of COVID-19 on the multiple measures of volatility, namely standard deviation, skewness, and kurtosis of all indices. All indices’ key findings show lower mean daily return than specific, negative returns in the crisis period compared to the pre-crisis period. The standard deviation of all the indices has gone up, the skewness has become negative, and the kurtosis values are exceptionally large. The relation between indices has increased during the crisis period. The Indian stock market depicts roughly the same standard deviation as the global markets but has higher negative skewness and higher positive kurtosis of returns, making the market seem more volatile.

The article analyzes the influence of inflation on economic growth and substantiates the main directions of increasing the effectiveness of the central bank's anti-inflation policy.
In order to determine the limit of inflation, the excess of which has a negative impact on the economic growth, the relationship is analyzed between the inflation rate and the real GDP growth rate on the basis of IMF statistics using the example of 158 countries. It was determined that in 2010–2017, in the global economy, the 6.0% inflation was the marginal value of the inflation rate, beyond which the economic growth rate declined or slowed down.
Given the inverse relationship between the inflation rate and the real GDP growth rates as well as empirical calculations for the period 1996–2017, the threshold for inflation rate for Ukraine at the level of 4.51% was determined based on empirical calculations for the 1996–2017 period. The results indicate that the National Bank of Ukraine set the inflation target above the level of the calculated threshold inflation.
It has also been established that the link between the rates of nominal GDP growth, as opposed to real GDP, and the inflation rate, is more direct and more tight. It is substantiated that to analyze such dependence it is better to use GDP deflator instead of CPI. The results indicate that deflation constrains economic growth much less than inflation.
In order to increase the effectiveness of the central bank’s pro-cyclical monetary policy aimed at supporting economic growth, the relationship between the rates of real GDP growth and the indicator characterizing the gap between the growth rates of M3 and inflation, which actually reflects the real money supply dynamics, is determined. The results obtained allowed to conclude that in 2009 and 2014-2017, the artificial “squeezing” of the money supply took place in Ukraine, resulting in a decrease in the level of the economy monetization by 22.0% in 2017 compared to 2013.
It has been proved that in order to minimize the negative impact of inflationary processes on economic growth, the policy of the National Bank of Ukraine should be aimed at eliminating the artificial squeezing of the money supply through a reasonable increase in the economy monetization and the implementation of an effective monetary policy.