Stock returns and economic fundamentals in an emerging market: An empirical investigation of domestic and global market forces

Abstract

This paper presents a model that links an emerging market's stock returns to domestic economic forces: changes in the dividend yield, trading volume, stock volatility, and illiquidity; and to global market forces: changes in the exchange rate, US market returns, and stress in the US market. Testing the data on aggregate market and 10 industrial sectors using an asymmetric PARCH procedure, we find evidence supporting a link to domestic forces. However, after adding changes in the exchange rate, US stock returns, and stress in the US market to the model, these global market forces overwhelmingly dominate the explanation of stock returns.