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
Highlights
There are two major motivations for analyzing reaction of stock market returns to macroeconomic movements
The results showed that exchange rate and oil price have no significant impact on the stock market returns in BRIC
5.1 Conclusion The current study aims to examine the effect of macroeconomic variables on stock market returns in BRIC economies
Summary
There are two major motivations for analyzing reaction of stock market returns to macroeconomic movements. It helps the investors to know how specific stock performs It provides clear idea of what macroeconomic events influence stock market indices. These indices are used as benchmark to evaluate performance of investments and the creation of financial instruments such as derivatives and options. Stock markets play as transmission mechanism for monetary policy, so understanding of the relationship between macroeconomics and stock market returns assist policy makers to enhance and monitor monetary policy. It serves as a transmission mechanism upon which savings are mobilized and adequately distributed across the economic sectors with the view to realize inclusive growth. In addition to the foregoing stock market performance the following functions: it boosts investors’ confidence in both financial institutions and even the entire economy; it indicates strength and viability of the productive sectors; and it facilitates capital allocation, investment and provides firms with ease avenue to have access to adequate and needed capital
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