Long Run Relationship between Aggregate Stock Prices and Macroeconomic Factors in BRICS Stock Markets

Emerging Trends in Management and Public Policy, 2016, Regal Publications, 1-28.

29 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: April 1, 2016

Abstract

This paper comprehensively examines the long run relationship between aggregate stock prices and select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate, Money Supply and International Oil Prices) in the emerging BRICS markets over the period 1995 to 2014 using quarterly data. To assess the impact of global financial crisis on this relationship, we consider two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Long Run Granger Causality Test, Johansen’s Cointegration Test (both Bivariate & Multivariate) and Vector Error Correction Mechanism (VECM) are applied. Overall, we find that there is unidirectional long run causality from Stock prices to GDP, Inflation & Interest Rate. A bidirectional long run causal relationship of Stock prices is found with Money Supply and Oil Prices. Also, the long run granger causal relationship differs significantly between pre and post crisis periods for all the macroeconomic variables. Johansen’s Cointegration results suggest presence of long run equilibrium relationship between BRICS Stock prices and select Macroeconomic Factors (except Inflation and Oil Prices). There was no major difference in cointegration results in pre and post crisis periods except for Inflation and Interest rate, implying that global financial crisis has led to greater long run integration of stock market with the real economy. VECM results indicate that error correction to restore equilibrium is more in stock market than in macroeconomic factors. Thus, in times of any destabilisation or disequilibrium in long run the real economy leads the stock market to a new equilibrium. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, academicians, researchers and investment community particularly in emerging markets.

Keywords: BRICS Aggregate Stock Prices, Macroeconomic Factors, Long Run Granger Causality, Johansen’s Cointegration, Vector Error Correction Mechanism (VECM)

JEL Classification: C22, C58, E44, G01

Suggested Citation

Tripathi, Vanita and Kumar, Arnav, Long Run Relationship between Aggregate Stock Prices and Macroeconomic Factors in BRICS Stock Markets (April 1, 2016). Emerging Trends in Management and Public Policy, 2016, Regal Publications, 1-28.. Available at SSRN: https://ssrn.com/abstract=2757550

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

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