Topics: Stock market, Inflation, Stock market index Pages: 10 (3407 words) Published: August 20, 2013
International Business & Economics Research Journal – March 2008

Volume 7, Number 3

Effect Of Macroeconomic Variables On Stock Market Returns For Four Emerging Economies: Brazil, Russia, India, And China Robert D. Gay, Jr., (Email: rgay@nova.edu), Nova Southeastern University

ABSTRACT The relationship between share prices and macroeconomic variables is well documented for the United States and other major economies. However, what is the relationship between share prices and economic activity in emerging economies? The goal of this study is to investigate the timeseries relationship between stock market index prices and the macroeconomic variables of exchange rate and oil price for Brazil, Russia, India, and China (BRIC) using the Box-Jenkins ARIMA model. Although no significant relationship was found between respective exchange rate and oil price on the stock market index prices of either BRIC country, this may be due to the influence other domestic and international macroeconomic factors on stock market returns, warranting further research. Also, there was no significant relationship found between present and past stock market returns, suggesting the markets of Brazil, Russia, India, and China exhibit the weak-form of market efficiency. Keywords: macroeconomics, exchange rates, oil prices, stock prices, Brazil, Russia, China, and time-series




n recent The Economist articles concerning the shortfall of buyers of developed countries’ assets, it was mentioned this shortfall could be made up by adding investors from emerging economies. However, for this to happen, continued growth in the emerging financial markets (EFMs) needs to continue their respective expansion, pushed by external investors. Wilson and Purushothaman (2003) identified four emerging markets (Brazil, Russia, India, and China or BRICs) which together could be larger in U.S. dollar terms than the G6 within the next forty years. The BRICs are the four biggest emerging economies combined they account for twofifths of the total Gross Domestic Product (GDP) of all emerging economies. Recently revised GDP statistics by the World Bank based on purchasing-power parity (PPP) showed GDP for China in 2005 was $5.3 trillion, compared with $2.2 trillion using market exchange rates (which can understate GDP figures) and $8.9 trillion using previous PPP estimates in contrast India’s GDP has also been slashed by almost 40%. With Brazil's GDP also down a bit, the share of emerging economies in world output (including Asia's newly industrializing economies) has been cut to 46% in 2005, compared with over 50% using previous numbers. However, GDP in PPP terms, all four still rank among the world’s top ten economies, with China and Brazil ranking among the top ten when market exchange rates are taken into account. Also, in terms of PPP, Brazil and Russia both produce more than India, which is expected to grow at the rate of five percent per year for the next thirty years. Tarzi (2000 and 2005) researched the flow of both foreign portfolio equity investments (FPEI) and foreign direct investment (FDI) to emerging markets. Between 1986 and 1995 stock market capitalization in emerging countries grew ten-fold from $171 billion to 1.9 trillion and market share held in capitalization increased from 4 percent to 11 percent, mostly to the nine major emerging markets including Brazil, India, and Hong Kong (now a province of China). In the 1990s FDI in developing countries as a ratio of GDP increased from 7 to 21 percent. Most of the increase in FDI went to developing countries like Brazil, China, and India. Russia, since the dissolution of the Soviet Union and the financial crisis of 1

International Business & Economics Research Journal – March 2008

Volume 7, Number 3

1997, has achieved more price and currency stabilization, orderly elections, and seen its inflation rate drop from 215% in 1994 to 8.3% in 1998, making it an attractive target...
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