Do macroeconomic factors matter for stock prices in emerging countries? Evidence from panel cointegration and panel causality

The concurrent growth of emerging countries stock market and their economies in the last two decades raises question regarding the fundamental linkage between stock price and key macroeconomic variables. This paper makes an attempt to examine the short-run and long-run relationship between stock prices and selected macroeconomic variables using data from three leading emerging countries such as Brazil, India and China (BIC) from January 2000 to December 2012. This paper supports the existence of a significant, long-run relationship between stock prices and macroeconomic variables. The results also indicate that there is a long-run Granger causality running from key macroeconomic factors to stock prices, but in short-run, only interest rate causes to stock prices. Since the stock prices interact with the key macroeconomic variables, a proper coordination in formulating a common macroeconomic policy is required among the BIC countries.