Relationship between Macroeconomic Factors and Aggregate Stock Returns in BRICS Stock Markets – A Panel Data Analysis

New Age Business Strategies in Emerging Global Markets, First Impression: 2015, Excel India Publishers, Page: 104-123.

20 Pages Posted: 1 Apr 2016

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: November 27, 2015

Abstract

This paper examines the relationship between select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate and Money Supply) and aggregate stock returns in emerging markets constituting the BRICS block over the period 1995 to 2014 using quarterly panel data. This relationship is also examined during two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Robust econometric tests like Panel Granger Causality Test, Pedroni’s Panel Cointegration Test and Panel Auto Regressive Distributed Lag (ARDL) Model has been used. We find that primarily in short run there is unidirectional causality running from stock returns to GDP growth rate, inflation rate, rate of change in exchange rate and money supply. The results are almost similar in pre and post crisis periods, except that in the pre crisis period, there is bidirectional causality between stock returns and inflation, while in the post crisis period it disappears. Long run panel causality results reveals unidirectional causality from stock returns to GDP growth rate in total and post crisis periods. However in pre crisis period, there was no long run causal relationship. Pedroni’s panel cointegration test shows that stock indices are cointegrated with GDP in total period and with GDP, inflation and money supply in post crisis period. Panel ARDL models have explanatory power ranging from 28% in total period to 62% in post crisis period. We find that while current stock returns are negatively linked to rate of change in exchange rate and money supply; they are positively linked to their own lagged values. In pre crisis period, rate of change in money supply significantly explains stock returns while in post crisis period, inflation rate, interest rate and rate of change in exchange rate and money supply negatively affects BRICS panel stock returns. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, researchers and investing community in emerging markets. The regulators need to ensure that financial sector reforms agenda consciously considers interlinkages between stock markets and real economy. The investment community can devise investment strategy, using the results of this study to earn arbitrage profits in emerging stock markets.

Keywords: Aggregate Stock Returns, BRICS Stock Markets, Macroeconomic Factors, Panel Auto Regressive Distributed Lag (ARDL) Model, Panel Causality, Panel Cointegration

JEL Classification: B26, C23, C58, E44

Suggested Citation

Tripathi, Vanita and Kumar, Arnav, Relationship between Macroeconomic Factors and Aggregate Stock Returns in BRICS Stock Markets – A Panel Data Analysis (November 27, 2015). New Age Business Strategies in Emerging Global Markets, First Impression: 2015, Excel India Publishers, Page: 104-123. . Available at SSRN: https://ssrn.com/abstract=2757527

Vanita Tripathi

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 (Contact Author)

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

New Delhi, New Delhi 110007
India

Register to save articles to
your library

Register

Paper statistics

Downloads
137
Abstract Views
565
rank
211,933
PlumX Metrics