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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.
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.
4. Research methodology
4.1 Type of Research
Hypothesis testing
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.
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.
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
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
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
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 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.
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
IBOVESPA
GOLD
s &p 500
s &p 500
OIL PRICE
OIL PRICE
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.