Stock Market Returns Under Macroeconomic Conditions: An Empirical Evidence from BRIC Economies

Abstract

Financial markets continuously incorporate information about macroeconomic events and monetary policy in order to make profitable investment decisions, and these are reflected in stock returns. In fact, financial markets have no perfect information, they do behave in forward looking manner, in that they monitor for new information that could affect the profitable investment decisions.  The main objective of our paper is to explore the sensitivity of stock market returns to macroeconomic environments in Brazil, Russia, India, and China. In order to achieve the objective, the authors utilized data for major macroeconomic factors namely exchange rate, inflation rate, interest rate and oil price for the sample period starting from May 2007 to April 2017. We utilized OLS estimation technique to estimate the empirical models of our study. The findings of show no significant relationship between respective exchange rate, inflation rate, interest rate and oil price on market returns of either BRIC economy. However, the regression analysis reveals insignificant positive relationship of exchange rate, inflation rate and interest rate with stock market returns while oil prices has insignificant negative relationship. This suggests influence of other domestic and international macroeconomic factors on stock market returns. Furthermore, in the collective panel regression model of BRIC economies, we found that inflation rate has significant influence on stock market returns of BRIC economies. The findings of study help investors to know how specific stock performs to take profitable investment decision. It also assists policy makers to enhance and monitor monetary policy and helps managers in risk management.

Keywords: Macroeconomic indicators, Stock market returns, OLS

JEL classification: E31, E44, G1

DOI: 10.7176/JESD/10-1-07