Do Macroeconomic Variables Affect Stock Returns in BRICS Markets? An ARDL Approach

Journal of Commerce & Accounting Research, Volume 4, Issue 2, April 2015

15 Pages Posted: 23 Aug 2015

See all articles by Vanita Tripathi

Vanita Tripathi

University of Delhi India - Delhi School of Economics - Department of Commerce

Arnav Kumar

University of Delhi - Delhi School of Economics - Department of Commerce

Date Written: August 21, 2015

Abstract

The Arbitrage Pricing Theory (APT) propounded by Ross in 1976 argued for a variety of macro economic variables (sources of systematic risk) in explaining stock returns. In the same vein, this paper examines the relationship between macroeconomic variables (GDP, inflation, interest rate, exchange rate, money supply, and oil prices) and aggregate stock returns in BRICS markets over the period 1995-2014 using quarterly data. We have applied Auto Regressive Distributed Lag (ARDL) model to document such a relationship for individual countries as well as for panel data.

Contrary to general belief, we find that GDP and inflation are not found to be significantly affecting stock returns in most of BRICS markets mainly because Stock returns generally tend to lead rather than follow GDP and inflation. In line with the theory and literature, we find significant negative impact of interest rate, exchange rate and oil prices on stock returns and a positive impact of money supply.

This study would be a valuable addition to the growing body of empirical literature on the subject besides being useful to policy makers, regulators and investment community. Policy makers and regulator should watch out for impact of fluctuations in exchange rate, interest rate, money supply, and oil prices on volatility in their stock markets. Investor can search for arbitrage opportunities in BRICS markets on the basis of these variables but not the basis of GDP or inflation.

Keywords: Macroeconomic Variables, Stock Returns, BRICS, Auto Regressive Distributed Lag (ARDL), Panel Analysis

JEL Classification: B26, C23, C58, E44

Suggested Citation

Tripathi, Vanita and Kumar, Arnav, Do Macroeconomic Variables Affect Stock Returns in BRICS Markets? An ARDL Approach (August 21, 2015). Journal of Commerce & Accounting Research, Volume 4, Issue 2, April 2015. Available at SSRN: https://ssrn.com/abstract=2649106

Vanita Tripathi (Contact Author)

University of Delhi India - Delhi School of Economics - Department of Commerce ( email )

Department of Commerce
Delhi University
Delhi, 110007
India

HOME PAGE: http://people@du.ac.in~vtripathi/

Arnav Kumar

University of Delhi - Delhi School of Economics - Department of Commerce ( email )

New Delhi, New Delhi 110007
India

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