Long Run Relationship between Aggregate Stock Prices and Macroeconomic Factors in BRICS Stock Markets

This paper comprehensively examines the long run relationship between aggregate stock prices and select macroeconomic factors (i.e., GDP, Inflation, Interest Rate, Exchange Rate, Money Supply and International Oil Prices) in the emerging BRICS markets over the period 1995 to 2014 using quarterly data. To assess the impact of global financial crisis on this relationship, we consider two sub periods viz., a Pre Crisis period (1995:Q1 to 2007:Q2) and a Post Crisis Period (2007:Q3 to 2014:Q4). Long Run Granger Causality Test, Johansen's Cointegration Test (both Bivariate & Multivariate) and Vector Error Correction Mechanism (VECM) are applied. Overall, we find that there is unidirectional long run causality from Stock prices to GDP, Inflation & Interest Rate. A bidirectional long run causal relationship of Stock prices is found with Money Supply and Oil Prices. Also, the long run granger causal relationship differs significantly between pre and post crisis periods for all the macroeconomic variables. Johansen's Cointegration results suggest presence of long run equilibrium relationship between BRICS Stock prices and select Macroeconomic Factors (except Inflation and Oil Prices). There was no major difference in cointegration results in pre and post crisis periods except for Inflation and Interest rate, implying that global financial crisis has led to greater long run integration of stock market with the real economy. VECM results indicate that error correction to restore equilibrium is more in stock market than in macroeconomic factors. Thus, in times of any destabilisation or disequilibrium in long run the real economy leads the stock market to a new equilibrium. These findings, besides augmenting the empirical literature and knowledge domain on the topic, have significant implications for policy makers, regulators, academicians, researchers and investment community particularly in emerging markets