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Effect of economic variables on stock market of BRICS emerging

economies
Abstract
The world is changing and becoming increasingly multipolar due to the emergence of
China, India, Russia, Brazil and South Africa forming so called BRICS. The communal strength
of the BRICS economies is of ever increasing importance to the strength of the global economy.
At the same time as matured economies across the world struggling with immense budget
deficits, weak growth and rising unemployment, the BRICS are mounting swiftly, lifting people
out of poverty and driving the global economy.
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 time series relationship between stock market index prices and the
macroeconomic variables such as S & P, gold prices and oil price for Brazil, Russia, India, China
and South Africa (BRICS).

1. Introduction
This study being a descriptive in nature examines the major economic indicators and
stock market index prices for Brazil, Russia, India, China, and South Africa (BRICS). The study
investigates the effect of macroeconomic determinants on the performance of the Stock Market
of BRICS using monthly data over the period January 2014 to December 2014 for
macroeconomic variables, namely, Gold Price, Oil Price, and S & P 500.
In 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. The
BRICs are the four biggest emerging economies combined they account for two fifths 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 Indias 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 worlds 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. 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.
Result of this study help in exploring whether the movement of Stock Exchanges indices
is the result of some selected macroeconomic variable. More specifically, in the study we use ttest and Regression analysis to see the effect of macroeconomic variables on BRICS Stock
Exchange Indices and vice versa. The results would be very useful for the policy makers, traders,
investors, and other concerned along with the future researchers.
The paper proceeds along the following lines. Section II presents the review of literature,
section III discusses the data, variables and the research methodology, section IV discusses data
analysis and results and section V offers conclusions.

2. Review of literature
The most comprehensive research into the linkage of stock prices and macroeconomic
factors was conducted by Muradoglu, Taskin, and Bigan (2000), Diacogiannis, Tsiritakis, and
Manolas (2001), and Wongbangpo and Sharma (2002), and Mukhopadhyay and Sarkar (2003).
Muradoglu et al. investigated possible causality between 19 emerging market returns and
exchange rates, interest rates, inflation, and industrial production from 1976 to 1997. Their
results revealed that the relationship between stock returns and macroeconomic variables were
mainly due to the relative size of the respective stock market and their integration with world
markets. In their study of the Greek stock market between 1980 and 1992 and its relationship to
18 macroeconomic variables, Diacogiannis et al. found significant high loadings between stock
returns and 13 of the 19 macroeconomic variables for both periods, 1980-1986 and 1986-1992.
Wongbangpo and Sharma explored the relationship between the stock returns for the ASEAN-5
countries of Indonesia, Malaysia, the Philippines, Singapore, and Thailand and five
macroeconomic variables. By observing both short and long run relationships between respective
stock indexes and the macroeconomic variables of gross national product (GNP), the consumer
price index (CPI), the money supply, the interest rate, and exchange rate they found that in the
long-run all five stock price indexes were positively related to growth in output and negatively to
the aggregate price level. But a negative long-run relationship between stock prices and interest
rates was noted for the Philippines, Singapore, and Thailand, and was found to be positive for
Indonesia and Malaysia. In the end, causality tests detected an overall relationship between
macroeconomic variables and stock prices for all five ASEAN equity markets. Lastly,
Mukhopadhyay and Sarkar conducted a systematic analysis of the Indian stock market returns
prior to and after market liberalization and the influence of macroeconomic factors on returns.

Specifically for the post-liberalization period (since 1995), real economic activity, inflation,
money supply growth, FDI, and the NASDAQ-index were significant in explaining variations in
Indian stock return. Nominal exchange rate, while significant during the pre-liberalization period
(1989-1995), was found to not be significant after liberalization.
Cheng, Gutierrez, Mahajan, Shachmurove, and Shahrokhi (2007) consider that while the
BRIC are not sure to become economic hegemony in the world economy, the interplay between
BRIC economies and other developing countries is viewed as a critical aspect of globalization
and interdependence. Mcdonaldm, Robinson, and Thierfelder (2008) use a global general
equilibrium trade model to analyze the impact of the dramatic expansion of trade by India,
China, and an integrated East and Southeast Asia trade bloc and productivity growth in the
region on developing countries. China is an integral member of the E&SE Asia bloc, with strong
links through value chains and trade in intermediate inputs, while India is not a part of any trade
bloc. There is a great uncertainty as regards to who will emerge as a major power and when the
US dominance will become definite history. In fact, it is very likely that only few countries will
emerge as central hubs of the system in the 21st century, creating a sort of asymmetrical multipolarity with a distinction between dominant or central powers, major powers, regional powers
and local powers.

2.1 Need for the study


I believe that it is important to analyse the stock market efficiency of rising countries on a
regular basis as the efficiency has concerns for the development of other countries. According to
Claesson (1987) the market conditions such as technology developments and stock exchange
turnover alter continuously, which supports the idea of testing the stock market efficiency
regularly. Since in recent years, numerous drastic occurrences have taken place in the stock
markets of various countries, it is of great interest to know and examine if these changes have
influenced the other countries policy making attributes in one way or another.
By calculating or showing correlation (positive or negative), and to what extent it is
correlated, investors can make decision where to invest and how much to invest in particular
index.

3. Objective of study
3.1 Main Objective
The main objective is to investigate the relationship between BRICS stock market and three
macroeconomic variables namely Crude Oil Prices (CO), Gold Price (GP), S & P 500. NSE
NIFTY, SSE composite, MICEX, FTSE, IBOVESPA have been considered as representing
BRICS stock market.
3.2 Other objectives
1. Studying the impact of Macroeconomic variables.

2. Examining the existence of correlation between stock price & macroeconomic


variables & the extent to which they are correlated.

4. Research methodology
4.1 Type of Research
Hypothesis testing

4.2 Sampling Technique


Convenience sampling technique used to pick sample
4.3 Dependent Variable
4.3.1 NSE Nifty:
The CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the economy. It
is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives
and index funds. CNX Nifty is owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialised
company focused upon the index as a core product. The CNX Nifty Index represents about
65.87% of the free float market capitalization of the stocks listed on NSE as on December 31,
2012.The total traded value for the last six months ending December 2012 of all index
constituents is approximately 50.23% of the traded value of all stocks on the NSE. Impact cost
of the CNX Nifty for a portfolio size of Rs.50 lakh is 0.06% for the month December 2012.CNX
Nifty is professionally maintained and is ideal for derivatives trading. From June 26, 2009, CNX
Nifty is computed based on free float methodology.
4.3.2 IBOVESPA:
The IBOVESPA is a major stock market index which tracks the performance of around
50 most liquid stocks traded on the Sao Paulo Stock Exchange in Brazil. It is a gross total return
weighted index. The index has a base value of BRL 100 as of January 2, 1968. Since 1968, The
Bovespa Index has been adjusted 11 times by a factor of 100 in 1983 and by factor of 10 in 1985,
1988, 1989, 1990, 1991, 1992, 1993, 1994, and 1997. Stock Market in Brazil averaged 15543.60
Index points from 1972 until 2014, reaching an all time high of 73516 Index points in May of
2008 and a record low of 0 Index points in January of 1972
4.3.3 SSE Composite Index:
The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The
index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai

Stock Exchange. The index was developed on December 19, 1990 with a base value of 100.
Index trade volume on Q is scaled down by a factor of 1000. Shanghai Composite Index was
quoted at 3160.17 on Thursday September 3. Stock Market in China averaged 1762.30 Index
points from 1990 until 2014, reaching an all time high of 6092.05 Index points in October of
2007 and a record low of 99.98 Index points in December of 1990.
4.3.4 MICEX:
The MICEX is a major stock market index which tracks the performance of 30 largest
and most liquid Russian companies from 10 main economy sectors, listed on The Moscow Stock
Exchange. It is a capitalization-weighted composite index. The MICEX has a base value of 100
as of September 22, 1997. Stock Market in Russia averaged 928.29 Index points from 1997 until
2014, reaching an all time high of 1969.91 Index points in December of 2007 and a record low of
18.53 Index points in October of 1998.
4.3.5 FTSE

- The FTSE/JSE Africa All Shares Index is a market capitalization-weighted index. Companies
included in this index make up the top 99% of the total pre free-float market capitalization of all
listed companies on the Johannesburg Stock Exchange. The FTSE/JSE Africa Index Series
resulted from a joint venture between the JSE Limited (JSE) and the FTSE Group (FTSE), a
world leader in the creation and management of indices. The series brought with it a change in
the philosophy and methodology for calculating indices and classifying sectors. The FTSE/JSE
Africa Index Series replaced the JSE Actuaries indices on 24 June 2002.

4.4 Independent Variables (03)


4.4.1 Gold Price:
Of all the precious metals, gold is the most popular as an investment.Investors generally
buy gold as a way of diversifying risk, especially through the use of futures
contracts and derivatives. The gold market is subject to speculation and volatility as are other
markets. The performance of gold bullion is often compared to stocks due to their fundamental
differences. Gold is regarded by some as a store of value (without growth) whereas stocks are
regarded as a return on value (i.e., growth from anticipated real price increase plus dividends).
Stocks and bonds perform best in a stable political climate with strong property rights and little
turmoil. Since 1800, stocks have consistently gained value in comparison to gold in part because
of the stability of the American political system.This appreciation has been cyclical with long
periods of stock outperformance followed by long periods of gold outperformance. The Dow

Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market)
and proceeded to post gains throughout the 1980s and 1990s.

4.4.2. Oil Price:

Crude oil prices measure the spot price of various barrels of oil, most commonly either
the West Texas Intermediate or the Brent Blend. TheOPEC basket price and the NMEX futures
price are also sometimes quoted.
West Texas Intermediate (WTI) crude oil is of very high quality, because it is light-weight
and has low sulphur content. For these reasons, it is often referred to as light, sweet crude oil.
These properties make it excellent for making gasoline, which is why it is the major
benchmark of crude oil in the Americas. Thanks to U.S. discoveries of shale oil, WTI is now at a
$9 per barrel discount to Brent.
Oil prices usually go up in the summer, driven by high demand for gasoline during
vacation driving times. Sometimes it will drop further in the winter, if there is lower than
expected demand for home heating oil, due to warmer weather
4.4.3. S & P 500:
The S&P 500 is a collection of 500 stocks intended to reflect the overall return
characteristics of the stock market as a whole. The stocks that make up the S&P 500 are selected
by market capitalization, liquidity and industry. Companies to be included in the S&P are
selected by the S&P 500 Index Committee, which consists of a group of analysts employed by
Standard & Poor's.
The index primarily mirrors the overall performance of large-cap stocks. The S&P 500 is
considered by analysts to be a leading economic indicator for both the stock market and the U.S.
economy. The 30 stocks that make up the Dow Jones Industrial Average were previously
considered the primary benchmark indicator for U.S. equities, but the S&P 500, a much larger
and more diverse group of stocks, has supplanted it in that role over time.
4.5 Data Used
Secondary Data

To study the relationship between the Stock market performance and selected economic
indicators we collected secondary data from different sources.
Time period One year From January 2014 to December 2014

4.6 Limitation of the study


1. The stock market performance is measured only through main indices of BRICS countries.
2. The time period of study is only one year and only three economic indicators considered for
the study.

5. Interpretation
5.1 Correlation
Dependent Variables
NIFTY

IBOVESPA

SSE COMPOSITE

MICEX

Independent
Variables
Crude oil

Value
of
Correlation
-0.663

Gold price

0.0487

S & P 500

0.965

Crude oil

-0.043

Gold price

0.039

S & P 500

0.583

Crude oil

-0.968

Gold price

-0.209

S & P 500

0.763

Crude oil

-0.289

Pearson Correlation
Moderate
correlation
Low
correlation
High
correlation
Low
correlation
Low
correlation
Moderate
correlation
Highly
correlation
Low
correlation
High
correlation
Low
correlation

negative
positive
positive
negative
positive
positive
negative
negative
positive
negative

FTSE

Gold price

0.260

S & P 500

0.331

Crude oil

0.439

Gold price

0.149

S & P 500

0.019

Low
correlation
Low
correlation
Low
correlation
Low
correlation
Low
correlation

positive
positive
positive
positive
positive

Table 5.1 Results of correlation


This Table shows the correlation matrix of BRICS stock exchanges indices and macroeconomic
variables. Correlations of all variables with their difference have been reported. Here, we have used
Karl Pearsons correlation analysis with two tailed and 5% significant level.
1. For NIFTY Crude oil is negatively correlated whereas gold and S & P 500 is low and highly
positively correlated respectively.
2. For IBOVESPA Crude oil is negatively correlated whereas gold and S & P 500 is low and
moderately positively correlated respectively
3. For SSE COMPOSITE Crude oil and gold is highly and low negatively correlated whereas
S & P 500 highly positively correlated respectively
4. For MICEX Crude oil is negatively correlated whereas gold and S & P 500 is low positively
correlated.
5. For FTSE Crude oil,gold and S & P 500 is low positively correlated.
5.2 t-test(Hypothesis testing)
Independent
variables
NIFTY

Dependent
Variable
Crude oil

Critical Value

Calculated
Value

2.200
29.953

Gold price

2.200

S & P 500

2.200

5.180
25.184
IBOVESPA

Crude oil

2.200

Gold price

2.200

46.837
34.394

Hypothesis
Accepted
Alternate
Hypothesis
Alternate
Hypothesis
Alternate
Hypothesis
Alternate
Hypothesis
Alternate
Hypothesis

S & P 500

2.200
45.777

SSE COMOSITE

Crude oil

2.200

Gold price
S & P 500

2.200
2.200

19.941
0.04
3.824

MICEX

Crude oil

2.200

Gold price
S & P 500

2.200
2.200

Crude oil

2.200

68.425
-0.827
-20.652

FTSE

206.993
Gold price

2.200

S & P 500

2.200

4.523
114.578

Alternate
Hypothesis
Alternate
Hypothesis
Null Hypothesis
Alternate
Hypothesis
Alternate
Hypothesis
Null Hypothesis
Alternate
Hypothesis
Alternate
Hypothesis
Alternate
Hypothesis
Alternate
Hypothesis

Table 5.2 analysis of t-test


Table above shows simple t test analysis for three Economic variables Crude Oil, Gold Price, S & P 500
and stock market of BRICS countries. It was found that for
For NIFTY , IBOVESPA and FTSE/JSE , all three economic variables the t-stat value is greater
than critical value at 5% significant level so we reject null hypothesis and accept alternate hypothesis
that means there is significant impact of economic variables on Nifty.
For SSE COMPOSITE and MICEX ,
1. Two economic variables that is Crude Oil Price, S & P 500 the t-stat value is greater than
critical value at 5% significant level so we reject null hypothesis and accept alternate hypothesis
that means there is significant impact of Crude Oil Price, S & P 500 on SSE COMPOSITE and
MICEX and
2. For Gold Price the t-stat value is greater than critical value at 5% significant level so we accept
null hypothesis and reject alternate hypothesis that means there is no significant impact of Gold
Price on SSE COMPOSITE and MICEX

5.3 Regression equations


Y= a+b1x1+b2x2+b3x3+b4x4+b5x5
For NIFTY

Y= - 12501.24 + (-0.00625) Gold price + (4.334) Oil price + (10.065) S & P 500
Y= - 12501.24 - 0.00625 Gold price + 4.334 Oil price + 10.065 S & P 500
If the values of Gold price, Crude Oil price and S & P 500 is known, the value of Nifty can be
calculated by multiplying the value of Gold price with -0.00625,Crude oil with 4.334 and S & P
500 with 10.065 and adding the constant -12501.24
For IBOVESPA
Y= - 83430.28+ ( -0.349) Gold price + (233.05) Oil price + (59.409) S & P 500
Y= - 83430.28 -0.349 Gold price + 233.05 Oil price + 59.409 S & P 500
If the values of Gold price, Crude Oil price and S & P 500 is known, the value of IBOVESPA
can be calculated by multiplying the value of Gold price with-0.349,Crude oil with 233.05 and S
& P 500 with 59.409 and adding the constant -83430.28

For SSE Composite


Y= 3152.73+ (0.004) Gold price + (-19.815) Oil price + (0.478) S & P 500
Y= 3152.73+ 0.004 Gold price -19.815 Oil price + 0.478S & P 500
If the values of Gold price, Crude Oil price and S & P 500 is known, the value of SSE Composite
can be calculated by multiplying the value of Gold price with 0.004,Crude oil with -19.815 and S
& P 500 with 0.478 and adding the constant 3152.73

For MICEX
Y= 1432.77+ (0.0063) Gold price + (-1.260) Oil price + (0.047) S & P 500
Y= 1432.77+ 0.0063 Gold price -1.260 Oil price + 0.047S & P 500
If the values of Gold price, Crude Oil price and S & P 500 is known, the value of MICEX can be
calculated by multiplying the value of Gold price with 0.0063, Crude oil with -1.260 and S & P
500 with 0.047 and adding the constant 1432.77.
For FTSE/JSE
Y= 3879.048+ (-0.006) Gold price + (7.611) Oil price + (1.095) S & P 500
Y= 3879.048 - 0.006 Gold price + 7.611 Oil price + 1.095 S & P 500

If the values of Gold price, Crude Oil price and S & P 500 is known, the value of FTSE/JSE can
be calculated by multiplying the value of Gold price with -0.006,Crude oil with 7.611 and S & P
500 with 1.905 and adding the constant 3879.048.

5.4 Graphical representation

MICEX vs Gold Price,Crude oil price and S & P 500 Nifty vs Gold Price,Crude Oil Price,S & P 500
14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
0.00

120
100
80
60
40
20
0

14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
0.00

120
100
80
60
40
20
0

MICEX

GOLD

nifty

GOLD

s &p 500

OIL PRICE

s &p 500

OIL PRICE

IBOVESPA vs Gold Price,Crude Oil Price and S & P 500 SSE COMPOSITE vs Gold Price,Crude Oil Price and S & P 500
80,000.00

120
100
80
60
40
20
0

60,000.00
40,000.00
20,000.00
0.00

15,000.00

150

10,000.00

100

5,000.00

50

0.00

SSE Composite Index


GOLD

IBOVESPA

GOLD

s &p 500

s &p 500

OIL PRICE

OIL PRICE

FTSE/JSE vs Gold Prive,Crude Oil Price,S & P 500


14,000.00

120

12,000.00

100

10,000.00

80

8,000.00

60

6,000.00

40

4,000.00

20

2,000.00
0.00

FTSE/JSE

GOLD

s &p 500

OIL PRICE

6. Findings
1. All the factors show significant relationship with stock indices except for gold price with
SSE composite and MICEX. These two showed that there is no as such significant
relationship.
2. Regression equations helped us to calculate to what extent stock indices and
macroeconomic variables are related to each other i.e. how dependent variable i.e. stock
indices move with respect to independent variable i.e. economic factors.
3. Correlation
a. The factors who show low correlation indicate that if there is a change in
macroeconomic variable then this leads to slight change in stock index. If it is
positive then stock index increases with increase in variable and vice versa. If it is
negative then it decreases with increase in variables.
b. The factors who are moderately correlated indicate that if there is a change in
macroeconomic variable then this leads to considerable change in stock index. If
it is positive then stock index increases with increase in variable and vice versa. If
it is negative then it decreases with increase in variables.
c. The factors who are highly correlated indicate that if there is a change in
macroeconomic variable then this leads to marginal change in stock index. If it is
positive then stock index increases with increase in variable and vice versa. If it is
negative then it decreases with increase in variables.

7. Conclusion

The study brings out some distinct conclusions many of which validate popular beliefs.
The main objective of this whole study was to try and compare the various stock exchanges
based on certain parameters in order to understand the impact of combination of the financial
world on the various entities within it especially in the context of globalization and increased
interest in the capital markets fuelled by surging growth.
The several research papers that have been considered outlined the gradual coming of
age of the BRICS stock markets over the historical period. The methods that we have used are
hypothesis testing, correlation and regression testing to benchmark the performance of our stock
market with that of a selection of BRICS stock exchanges on the basis of their diversity with
respect to socio political-economy.
The analysis of the effect of international macroeconomic factors i.e. gold price, S & P
500 and crude oil price on the stock market exchange price of Brazil, Russia, India, South Africa
and China reveal that there is no significant relationship between SSE Composite and gold price
and between MICEX and gold price. This is not unexpected, as other international and domestic
macroeconomic variables (e.g., production, inflation, dividend yield, interest rates, trade balance,
and rate structure) may also have a role in the determination of stock price expectations. Rest all
showed significant relation in t-test.

8. Recommendations
1. Except for relation in gold price with SSE and MICEX, all the factors show significant
relationship.
2. This study helps investors to make investment decision according to positive or negative
correlation.
3. Investors can also predict the value of dependent variable i.e. stock indices by putting
values of gold price, oil price, and S & P 500 in regression equation.

Bibliography
1. Robert D. Gay, Jr. (2008), Effect Of Macroeconomic Variables On Stock Market Returns For
Four Emerging Economies: Brazil, Russia, India, And China, Nova Southeastern University.
2. Abdullah, D. A. & Hayworth, S. C. (1983). Macroeconometrics of stock price fluctuations.
Quarterly Journal of Business and Economics, 32, 1, 49-63.
3. Akbar, Y. H. & Samii, M. (2005). Emerging markets and international business: A research
agenda. Thunderbird International Business Review, 47, 4, 389-396.

4. Naganathan Venkatesh Research Scholar, NITTTR, Rise of BRICS Economy and its Impact
on Global Stock MarketsIRACST International Journal of Commerce, Business and
Management (IJCBM), ISSN: 23192828 Vol. 2, No.1, February 2013.

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