The causal relationships between stock prices and macroeconomic variables in Brazil during the period 1995-2004

Abstract

During the period 1995-2004 the market capitalization of the Brazilian stock market rose from 22.2 % to 51.2% of the GDP and this market suffered several qualitative changes. These changes require a better understanding of the Brazilian stock market characteristics, in particular with respect to its efficiency in processing the information about macroeconomic variables. With this aim, the paper analyses the relationship between a set of macroeconomic variables (industrial production index, price index, interest rate, monetary offer and country risk) and the stock prices during the period from 1995 to 2004, using monthly data. The methodology used to test the informational efficiency of the Brazilian stock market is based on Granger causality tests between the macroeconomic variables and the São Paulo Stock Exchange Index (IBOVESPA). The method used is the one proposed by Toda and Yamamoto (1995). The results show that the Brazilian stock market is not information efficient in relation to the price index, short-run real interest rate and country risk. In the case of country risk (EMBI+) the market was able to anticipate some information, but could not process efficiently all the relevant information about this variable. In contrast, the market is efficient in relation to monetary offer and industrial production index. These results are consistent with the conclusions of similar studies about the Brazilian stock market as well as the stock markets of other developing countries, with regard to the incapacity of these markets to process efficiently most of the relevant macroeconomic information.