ESTIMATING THE RELATIONSHIP BETWEEN BRICS AND U. . TOCK INDEX
RETURN USING PANEL REGRESSION METHODS

by

Adejimi

demuyiwa

B. c. Obafemi Awolowo University Nig ria, 2011

THESIS SUBMITTED IN PARTIAL FUL ILLM NT OF
THE REQUIREME T FOR THE DEGRE OF
MASTER OF SCIENCE
IN
BUSINESS ADMINISTRATION

UNIVERSITY OF NORTHERN BRITISH COLUMBIA
July 2015

© Adejimi Ademuyiwa, 2015

A KNOWLEDGEMENT
I thank
al

od

ll11ighty [! r th

ful c mpl ti n f thi

u

K hind and Mr . Juliana

like t thank my par nt , Mr. M

th ir upp rt and prayer
br th r, an IT
ibling

in all ramifi cati n .

n ultant, Mr.

d d ym

appr ciate th pati en

d da

d bunmi and
and n

A big thank you t Pa t r

rk. It ha b

p

ial thank

d muyiwa and hi

i t r F 1 run

urunil la
t

my

family in th

. I w ul

d muyiwa fi r

er-under tanding'

.K .

upp rt. I will n t fi rg t t

d b la , [! r their m raJ

ura g m nt fr m m y b

n Hi gra

t friend and partn r, Ife Juwa

and hi family . May

d c ntinu e the g

kinbil e.
d w rk in

you and y ur family . Y u ar all w nd rful.

A p cial thank t my up erv1 r
contribution to the
Raymond

ucce

ox, Dr. E lizabeth

f thi

r. R za

h wdhury, fi r hi

mptn al w rk.

roft Dr. J alil

t

upp rt, advice and imm en e
my c mmittee m ember : Dr.

afaei B ro j eny thank you all fi r allowing me to

tap from your wealth of know] dge. My gratitud e al o goe t Dr.
Zahir for their in ightful contribution to thi w rk.

man Lantana and Dr.

aif

b tract
RI

th r lati n hip b tw

amm

Thi

(Brazil Ru ia In ia,

n t b th th g1 ba1 fin n ia1

fr m 1 0 t 201 . hi r lati n hi i furth r
in 2007-200 and BRI

n minal int re t rat

and

in 1 7-1 9

.T

ariabl

111

ntr 1 fl r th
luding

chang rat ar in luded in
I th t ind

f

P gr

th rate,

h pan 1 regr

m th d ar u d in thi th

. Re ult r

ignifi antly r p n i e t th

. . t ck mark t p ril nnanc . H we

r turn in

RI

t ck market ar

r th finding

h w that

ck mark t did n t und erp ril rm during th gl bal fin ancial cri i . In t ad,

the BRI
r turn

d during that tim . Th

original d in th BRI
in tho

uth

ring th 1 eri d

r tum u ing a pan 1 data c

fri a)

ind

hin and

countri

n mt

ad

ly affe t d ind

hibit that whil
return

thi n gati e impact can be r duced by h

. . t k mark t p rfl rming w 11 during th
fr m b th BRI

r ult al

and

am time. Hen

f re p

mg

fin an iaJ en e

tive t ck mark t
t ck

ubj ect t the

, a p rtil li c n i ting f t

k

. . mark t c uld b ben fi ciaJ fl r reducing th ri k f finan cial cri
f

The the i conclude with p li cy rec mm ndati n ugge ting that a clo e m nit nng
financial market i

Rl

riti a! fl r BRI

t r wh preil r t inve t in

a ne d D r intemational fund manager wh inve t in newly emergin g

t

. . t ck .

, there i

ck mark t

evaluate

the value and tability of d me tic CUlT ncie a part of their t ck market inve tm ent deci i n .

Keyword s: Panel data, BRI

tock ind ex return ,

II

. . st ck index retum , finan cial cri

T BLE OF

ONTENT

A kn wl dg m nt
..

b tra t
Tabl

11

f c nt nt

111

Li t f tabl
..

Li t f figur
hapt r

ne

11

1

Intr du ti n
1.1 Backgr und

erview ofBRI

4

1. M ti ati n :G r thi the i

7

1.4 ignificance f thi th

7

f thi th

9

1.2

1.5 Limitation

10

hapter Two Literature R view
2.1 Relation hip in t ck market index return and emergin g tock

market index return

10

2. 1.1 DePeloped ver u emerg ing stock market index return.

10

2. 1.2 Effect of global financial cri i on stock index return

12

2.2 Relati n hip between tock ind ex return and macroecon m1 c
indicator in dev loped and de eloping c untri e

14

2.2. 1 Stock ind x returns and macroe onomic indi a tor
in d v loped ountries

15

Ill

2.2.2 to kind

r turn and ma ro

01107?11

indi ator
17

m m r zng ountri
2.3 R lati n hip b twe n tock mark t p r.D nnance and
con 1nic fundam ntal in BRJ

c unt1i

2.4 Key ob rvati n fr m lit rature re 1 w
hapter Three M th d l g and Data

naly i

23
25

3.1 ample data
3.2 Variable fo r model

21

25

cti n

26

3.2.1 U.S. lock index r turn.

26

3.2.2 GDP ro-vt ·th rat

28

3.2.3

29

aminal intere t rat

3.2.4 Exchange rate

30

3.2. 5 Finan cial crisi

31

3.3 Estimation method

34

3.3.1 Fixed effects method

34

3.3.2 Random effects method

35

3.4 Empirical Models

36

Modell: Based on U.S. global finan cial crisis

37

Model 2: Based on BRICS-specific Finan cial cri e

37

Model 3: Ba ed 0 11 both U.S. and BRICS- p eciflc Financial crise

37

3.5 Dia gnostic Test

38

IV

hapter F ur

40

mpilical Re ult
4 .1 D

cripti

tati ti c

4.2

n lati n

twe n BRI

40
ind

r tmn ,

r turn and M a r ec n mrc ariable

4. R gr

i n R e ult

44
45

5

4.4 urrunary of findin g
hapter Fiv

. . ind

nclu ion

59

5.1 Finding and p licy recomm nd ati n

59

5.2 Lilnitati n

61

f thi the i

5.3 R ecorrun end ations fo r fu ture re earch
R eference

62
63

v

LI T OF TABLE
Tabl 4.1
Tabl 4.2

IT

lati n b tw

Macr economi
Table 4.

Table 4.6

R turn and
45

ariable
):

bal Fin ancial

- p cifi fin an ial

Pan l R egre i n BRI

ing P

1 bal

):

ing F i ed and R and m
Table 4 .5

41

t ck Ind

n M nthl y BRI

Pan 1 R gre i n BRI
BRI

Table 4.4

f m nthly pan 1 data

mmnary tati ti

111

n 1 v r u

1d

46

ncial

49

ffect M eth d

Pan l R egr

ion (BRI ) :

U ing ix d

f~ ct

bal Finan ial

n J

M th d

Pan l R egre io n (BRI
BRIC - p ecific Finan cial

):

51
J

bal Financia l

ri i

sing Fixed

vi

ri i and
ffects M ethod

54

Ll T OF FIGURE

ig. J: Tim

n e di tributi n find

r turn cri

vii

untri

4

HAPTERO E
I TROD

TION

1.1 Background

untri

f m rg1ng

h gr wmg 1mp rtan

in the

rld

m1 e

h

gr wn at a rapid pac and are b
untri

in tenn

ad an ed

tm nt. Th r ha been a rem rkabl
P) in r

D me tic Pr du t

f gl bal

n m1

accounted £ r

a

unt d II r

% f gl b 1

1%. In re ent time , h

more than 70% f gl bal
World Ec nomic

uti

nt

e

nt n w pp rtunitie

f em rging

ingl m re integrat d

mmg m

f trad and in

n m pr

untri

hav

i th th m t d

ed

hift in th c mp

iti n

ar . In the earl y cighti , ~ r
P

ampl e the

hil e m rging and devel ping countri e

r, m rgin g and de

pm g c untri e a c unt II r

DP ace rding t the lntem ati naJ M n tary Fund (1M ) rep rt

k a of

pril 20 J 5. Thi re ulted fr m impr ved eco n mic growth

emerging countri , particularl y in BRl

1

f
f

in recent year ( DP growth i 2. 96%, on average, a

of 2014 Q4)2 .
A c n iderable body of re earch ugge t that financial market ex rt a powerful influ nee n th
economic development of a country (Levine, 2005 , 1997). For exampl e, when quit y, bond , and
derivative market enable the diversification of ri k, thi encourage m re in e tment in higherretum asset . Further, a well-functioning fin ancial ystem ea e infom1ation and tran action co t
and thereby enhance resource allocati n and economic gr wth (B eck and Lev ine, 2004 ). Bu t,
when a financial

y tern fai l

to per-D rm the e fun cti on

ffi ciently, thi

tend

to hinder

1

, BRI

cou ntrie include raz il , Ru ia, Ind ia, hina and outh fr ica
~ rowth rate of respecti ve BRI
count rie in lude: Brazi l (0.2°o); Ru s, ia (0.7° 0 ); India (5 .3° 0 );
outh Africa (1 .3%). Refer to http://ie onomics.com/brics-gdp-annual -gr wth -rate-ln -20 1-1

li Page

h1na (7 .3° 0 ) : and

conom1c growth and curtail
particularly m BRI

i

c n m1c opportunitie . R c nt gr wth m

al o partially influ n ed by rapid gr wth

According to Blo mberg, mark t capitaliza ti n in BRI

In the pa t decad , th BRI

c untri

(with ut

m rgmg countri

f th ir t

k m arket .

uth Africa) t ck mark t

nj yed ec n m1c tability in pite f the recent gl bal
rld in 2007-200 . R cent ec nom1c foreca ts have

anticipat d that BRI
the emerging countrie
the total nominal

count1i

will

er th n

hibit

t 50 ear .

DP for the :fl ur BRI

cepti nally hi gh economic gr w th rat
cc rd ing t

ldman

ach , it i expected that

countr ie (Brazil, Ru ia Indi a and

12 trilli n in 205 0, compared to 66 trill ion :fl r the

am ng t

hina) will reach

7 c untrie 3 at the am e time. M oreov r,

the combined GDP of the fo ur leading em erging countrie i likely to m atch that of th e United
State (U .. ) by 2032 (Kup chan 20 12) . Ace rding to Zhang et al. (20 13), the BRI

countrie

are currently at a si1nil ar level of newly advanced economic development when compared to
other emerging countrie . For example, recent tati tic report that the h are of BRI

in global

export is expected to increase from 12.4% to 20. 1% in 2015 , while the U .S. export hare i
proj ected to fa ll from 25% to 22% in the sam e year (Wilson and Puru hothaman, 2003) . Due to
their rapid economic growth and future growth pro pects, inve tors eek financial asset (e.g.,
stocks, bonds, etc.) in BRICS emerging m arkets for the prospect of high retun1 on their
investments. This, in tum, has resulted in an increase in market capitalization of BRIC

stock

market and also increased their financial interdependence fro m the re t of the world. Hence,
understanding about potential return on investment in BRI

1

7 countnes
. are

21 Page

stock m arket and their respon e

anada, France, Germany, Ital y, Japan , th e U .S. and U .K.

t

hang
ountri

m
1

c n m1c and finan ial mark t fundamental

m b th d m

tic and £ reign

con m1c

k (April 2 0 15)

b coming rucial £1 r pot ntial in

f th world , th IMF W rld

Among t the dev lop d c n 1n1
report that th

.. ha th w rld' large t nati nal ec n m y, r pre

of nominal global GDP at th

nd

mark t in th w rld t day i

p rated in th

cc rdin g t
appr ximat ly

Bu in

In id er (

. - th N w Y rk

emb r 20 14) th

af£ ct d th ir credit m ark t but al

au

and early M arch 2009 the D w Jon

Indu tri al

qu nt

ffect

d

of thi

imat ly 22%

t influ ntial financial

m arket capitalizati on of the

tock mark t t lo

Y -< ) .

hange

tock

ubprime m ortgage en

2 1 trillion . H

6 547.05 . The sub

ntin g appr

f the larg t and m

f 2014 .

utl

111

Y

1

2 007 n t onl y

valu e. B twe n July 2007

rage, il r e ampl , dropped from 14,000 t

r c nt fi nancial cri i

in the

.S. have been

characteti zed a the w or t financial turmoil ince the

reat D pre sion of 1929 (Dimitriou et al. ,

201 3). The w ort part of thi fin ancial downturn in th

.S. i th at the con

quence of thi s c ri sis

quickly convert d into a global financial crisi . H owever, the am ount of total foreign capital
mobility through investment in foreign stocks increa ed sub tantia ll y throughout the world after
the global fmancial crisis. The U. S. Trea ury data show

that while Ameri can inve tor h eld

foreign stocks of about $ 5.2 trillion, foreign inves tors held U .S. stocks of about

3.1 trillio n at

th e end of 2007 (U. S. Treasury Dep artment, 2008) 4 . After the fmancial cri i , foreign

tock

holdings by American investors grew to $9.1 trillion b y the end of 201 3, while at the am e time
fo reign investors' holding of U . . stock al so in crea ed to $5 trilli o n. Thi
investors

tarted looking for more attra ctive place

American investor
4

for hi gh er return

co uld b

b ca u e

n their inve tm ent ;

increased investm ent in stock m arket with high grow th pro p ect , and

Onl y in ast A ian tock markets, U.S . investors had tota l investm ent of$ 1.1 tri llion wh e r a investor from East
Asia in vested $560 billi on onl y in the U.S. tock market as of mi d-June 2007.
3 I Page

for ign in

tin cheap Am ri an to k with a h pe £ r higher capital gain

tor pr D rT d t in

in coming year . A

a r u lt th

c -integrati n among indi idual

in lu ding NY E and

ther t ck mark t m m ergm g

untri

t

k market

w rldwid

d aft r th

ignifi

recent gl bal fmancia l cri i ( hkili and

guyen 20 14). It i th re£ r i1np rtant t und r tand

h w th

the p r£ nnan c

untrie

t ck market mi ght influ n
In additi n, it i

cru ial t

d t rmin

downfall in 2007 -2 008 af£ cted p t
c untries. Likewi

important role in o

rc ming th

m ergm g c untrie . In thi th
tock ind ex return

f

y

h th r and h

tor ' r turn

, it i inter ting t kn
ad
I addre

h at

t

r e

t ck market in

ffec t

th

. .

m rgm g

tock market'

n 111 e tm ent in t ck in m rgm g

tent th

. . t ck m ark t mi ght play an

f c untry- pecifi c fmancial turmoil in

the a£ rem enti ned finan cial i ue b y con id erin g

and fi e BRl

c untri e

a

indi cator

of

tock market

performance in developed and em erging t ck m arket , re p ecti vely during the peri d 1990 t
201 3. A ccordingly, I answer the foll wing three re ea rch que ti ons in m y the i :

1) How do es the U . . to ck m arket p erformance influence BRI

tock m arket ?

2) How did BRICS stock m arkets react to the effect of the 2007-2 00 8 financial cri i in the U.
stock market?

3) What is the consequ ence of financial crises origin ated in BRIC

eco nom1e on their stock

index returns and what is the rol e of the U. S. stock m arket performance during such cri e ?

1.2 Overview of BRICS stock markets

Brazil: The Brazilian

tock market was incorp orated in 1890 but

tarted a n ew sy tem of

electronic trading in 1997. The market has hi gh potential for growth as th e economic policie
allow free flow of capital into the economy thereby ncouraging fo reign inve tor to inve t in
41 Page

thi mark t.

un ntly th Brazilian tock mark t i growing at an annual rat of 18 .2% p r

aJIDum according to a recent rep rt by Bl
billion a of January 2015 (Bl

Russia: In lat

mberg which tated it mark t capitalizati n f

mb rg, 2015).

1994 the Ru ian

t ck mark t

ta11ed an

op ration. Th main mark t in Ru ta 1 th M

c w

after the merger f th tw

d e

Ex hang (MI

24

larg

w-ba

X) and the Ru ian Trading

1 ctr rue trading
chang

t ck

y tem (R

th M

y t m in it

whi h wa d veloped
c w Interbank

un n y

) n 19th D c mber 2011 ( erikova

2012).Acc rdingtoW r tall(2014) th mark ti cun ntly growingatanannualrateof18 .7%,
5 l billion a at

vemb r 2014. Thi growth wa

cellent per£ nuance f many Ru ian companie

e pecially the il companie that

and total mark t capitalization i ab ut
driven by

attracted a large number of foreign inv t r ( aleem and Vaihekoski, 2008). Thi has re ulted in
increa ed foreign equity owner hip during the last decad .

India: The largest tock exchange in India i the Bombay tock

xchange (B E), incorporated

in 1875 . In 1995, the stock market started providing modem fully automated, screen-ba ed
electronic tTading sy tem which facilitated easy trading for investor around the country. It i
also considered the oldest exchange in the South A ia region. According to the World Federation
of Exchanges (January repm1) , this exchange market is ranked as the tenth largest stock market
in the world with a market capitalization of $1.7 trillion as of January 2015. Considering its
significant annual growth rate of about 8.5%, investors see this market as a potential avenue to
increase wealth.

China : The Chinese stock market is the largest market when compar d with other emerging
market in the world . It has the two fastest grow ing stock markets including the hanghai

5I Page

tock

x hang and th

h nzh n t

mark t api tali ati n at
hnhn

t

t k

hang

th

5.5 tri IIi n

f Ma

201

hanghai

(January r p rt), th

apitalizati n f 4.4 trilli n a
m

200 , th

hanghai

5

f Ma 201

. Th

limb d

mp

5 00 .

the mark t at ab

w rid'

d rati n f . .

hang

third larg t t k mark t
rg'

rd in g t

rid' ninth larg t t k mark t, i

hang , th

k

rding t th W rld

hang .

k

rep Ii furth r tat

y

rep rt, th

alu d at a t tal mark t
th at [! r th fir t tim

% in the fir t we k f Jun 201 5, 1 mg

p n enc hi gh gr wth

1 b 1 in

t nti al in thi

market.
South Africa:

fri a i th

uth

ha fa orabl e on mic p lici
ll1

uth

annu al gr wth rat

nd large t
in th r gt n,

frica (J f[i ri
f 5% .

and

a re ult,

n my in the

hi h t nd t attra t a larg number f [! reign

k ahalam, 2 00) .
uth

capitalization of ver

xchange (J

trillion a

formed in 1 87 during the fir t outh

he c untry currentl y

nJ y an

frica ha th large t t ck exchange in Afri ca,

which i cun ntly rank d nineteenth in th w rid in t rm
previou ly J hann burg t ck

fri ca n regi n6 . The c untry

f market capitali zati n. J

limited,

), ha ab ut 500 li ted compani e and a market

f 20 14, acco rding to it official w b ite. The J

wa

fiican go ld ru h. imi lar to oth er BRI

th e

countri e

J E upgraded t an electr nic trading y tern in the earl y 1990 .

5

Refer to '' hina 's tock Market on trac k to reach $10 Tri lli on in Value" by Kyoungwha Kim , Jun e 5. 2015
urrent ly, in term of GDP, Ni geria i the largest economy in the reg ion. " pec ifi c to igen a. rec nt reba ed
Gr .. Domesti c Product (GDP) ranked the country a. th large. t ec nomy 111 Afri ca ( . man. 20 15 it 1ng ati nal
Bureau of Statisti c (NB ), 20 14, p. 4 13). The new data estim ated the N igerian econom y at 80 . tnlli on ( 510
billion) for 2013 (NB , 20 14) . An NB rep rt relea ed n Apri l 7, 20 14, rev aled di erse eco n mica tl \ ltle"
rangin g from agri culture with about 17.26 tril li n, trade 13.35 tril lion, rude p trol um and natura l ga. 11 strillion , telecom N6 .97 tri ll1 n, real e. tate N6.43 tnl lion , manufacturi ng 5.47 trilli n, fo d, beverages, and
tobacco N3 .70 tri ll i n, finan ce and in urance N2.64 tn llion , and motion pi cture, s und record tng, and mu"1
production Nl.l3 tri ll io n. he ni ne ecto r li ted above c nt rib ute 85.4% ft he total DP" ( man, 201 5. p 4 1) }.

6

GI Page

1. 3 Motivation for thi thesis
Du

to th ir rapid growth

in th

t ck mark t can ea ily attract

BRI

finan ial

in rea ing amount of int tnati na l apital. Furth r global in

a

in

t cla

und r tanding

f th

int rr lati n hip
BRI

rd r t

functi n

bang-£ r-the- buck". Till

i

market

financial market

d £ r bett r

nder tanding th

pr perti

r lat d t

f BRI

111

er th re ha be n a fa t tr nd of d v lopm nt in

luding the c mm dity m arket, the mon y market and
countrie . It i

am ng foreign in e tor and inve tm nt banker t
BRI

n

k mark t , th ir dynamic ri k -r tmn pr p 11i

1 p d market .

and pmt:G li manager . M r

xchang

ha J d to th

n w b c ming a fundamental c ncern £ r int mati nal

both economic and financial tm tur
the for ign

t

RI

and r acti n t de

tock market

policymak r

gain m r

ek attractive

tor

therefore, al

bee mmg 1mp 11ant

und er tand wh ther uch rapid gr wth

f

hould be attractive £ r portfolio investment. While ex i tin g re earch

explore the e i ue in the context of developing ver u d velop ed countri e , a well a in ca
of financial market cri e , in general, there i not ufficient evidence that xplain the above
dynamic relation hip between developed and em erging tock market , particul arl y BRI

, with

respect to global versus domestic financial cri e . Thi gap in literature motivated me to addres
my re ear ch que tions, as stated in section 1.1.

1.4 S ignificance of this th esis
This thesis makes impm1ant contributions by focusing on asp ects of BRICS tock market u mg
panel estimation. The major contributions of the thesis are a follow

1. Several studies have examined the relationship between BRI

tock markets and U .

tack markets. Some of the mo t recent tudi es include Hwang et al. (2013). They ha e
71 Page

tudi d thi relati n hip by u mg tim

n

data . Th

th

1

will pr vide additi nal

lit ratur related to th topic.
2. An th r major contributi n 1 in t nn
effect

f th

r c nt

gl bal finan ial

incr a ingly recognized in earli r r
th effect of BRI

c untrie

t

n BRI

k index return

arch a limit d number of tudi

- p cifi financial cri

f both th recent gl bal finan ial ri i
BRI

f the ffl ct of financial cri i . Alth ugh th

. Thi the i

hav e amined

h w v r, xamin

th

ffect
of

[ 2007-2 00 and individual financial cri

imultane u ly to und er tand th ir relative con quence

n BRI

tock mark t .
3. A of 2010 Brazil Ru ia, India and
emerging countri e . Lat r on

outh

hina were c n id ered a

the fa te t growing

fri ca became a member of thi group of em erging

economies in December 2010 whi ch fin ally fo 1n1ed the group of countri e
BRIC .

o stud y has howe er, ob erved wh ther inclusion

made a major change in the relation hip between

.. -BRI

f

called

uth A fri ca in 2010

stock index perfonnance .

This paper has addre sed thi gap in the literature.
The rest of this thes is is organized a follo w : Chapter Two gives a review of related literature on
the relationship betw een developed stock market and emerging tock m arkets with emphas is on
the BRICS countries. The chapter also highlights how this paper di ffe rs from others. Chapter
Three discusses panel data and m ethodolo gy employed in thi s empirical the is. In Chapter Four,
the estimated empirical results are presented and discussed. Chapter Five includ es conclu ion
and policy recommend ations as well as su ggestions fo r potenti al ar eas for future re earch.

BI Page

1. 5 Limitations of this the is

Thi th i fa

limitation in t IID

f btaining data [! r p cifi tim int rval . F r in tanc

t m nthly data £ r tock inde
m nthly data of

era l country- p

fi·i a. A

uch a

uth

countri

Anoth r limitati n fa

pre nee f

9I Page

uch m nthl

treme alu

the e outlier by u ing

ifi

trem

ariabl

( .g.

r turn £ r BRI

untri

DP gr wth) £ r

RI

c untri

data i u ed t mak data fr qu en y c n i t nt [! r all

d in thi

tud y i the pre nee

f

utli er (fi r e ampl

th

f n minal int r t rat £ r Brazil in 199 and 1994) . R m val
tud ntiz d d

iat t t ha reduced th

f

ample ize in thi the i .

HAPTER TWO
LITERATURE REVIEW
Thi

hapt r highlight k y finding

the r lation hip betwe n d

f r le ant lit rature.

el p d t ck mark t ind

return and em erging

r tu1n . It al o ummarize th findin g in lit ratur that addr
gl bal fin ancial cri i in the

. c n my n t

arli r tudi

ecti n 2. 1 d crib
t

on

ck mark t index

the effect of the m

t r cent

k mark t perfi rmance.

the relation hip betw en tock mark t r tum and macroec n mi c indi at r in both devel ped
and devel ping c untri

ti n 2.3 in lud

finding about the relati n hip b twe n

maJket performance and econ mi c fund am ental in

R1

countrie .

t

ck

ection 2.4 ummarize

the chapter.

2.1 R elation hip in stock market index retu rn and em erging tock market index returns
The integration of emerging tock market with developed countrie is becom.ing increasingly
significant. The U .S. t ck market, for example pl ay a critical ro le in intern ational capital fl ow
and thus influence subsequ ent retu1n of tock indice in other stock m ark et world wid e. T hi
section therefore provid es some of the recent

tudies that have examin ed such relation hip

among stock m arkets between develop ed and emerging countri e .

2. 1.1 Develop ed versus emerging stock market index returns
A number of studies have examined the co-movement in stock index returns between develop d
and emerging stock markets. Most of the studies have focu ed on the U

stock markets and

measured its performance by either S&P 500 or N YSE tock index return . For examp le, Hwang
et al. (2 01 3) uses an exponenti al form of a time- erie

10 I Page

model (i.e., Dynamic

onditional

rrelation

n ralized Autor gre i e

xponential

timat dynamic conditional con lati n f t
different em rging tock mark t . Th

of co-int grati n b tw en th
po iti e int racti n in

tudy cov r the p ri d fr m January 200 to

mark t ' ind
Dynamic

return . T
onditional

Taiwan and M alay ia . It id ntifi

r turn

D

b tween

outh

th und rl ying reason
tudy find a tron g

&P 500 and c n e ponding emergiJ1g
tudy utilize

lati n

Multi ari at

eneraliz d

utoregre ive

e timati n

f c nditional c rrelation

imultaneou

a m d 1 (i . .,
onditionaJ

f conditi nal c n eJati n over tim e. The tudy find that "increa e

( redit Default

wap) pread and T D (Treasury Bills and

future contracts) spread decrea e conditi naJ c n elations. In c ntrast, increa e
(Volatility Index of the

hina

hann I of c nlagi n, the

Hetero keda tic model) that allow

in both the U . .

f Brazil Ru ia India,

c mb r

id enti f
IT

coeffi cient and d tenninant

untri

. . and the e em rging tock mark t . Th

t ck ind

mod 1) t

keda ti

k r turn b twe n &P 500 ind x and that f t n

2010 including t ck mark t fr m mergmg
Africa Kor a, Thail and Philippine

onditi nal Het r

hicago B ard

ption

urodoll ar

in the VIX

Exchange M arket) , fo r ign instituti nal

inve tment, and exchange rate vo latility rm e conditional con-elati ons between

&P 500 and

other emergin g co untri es ' indices ." (p . 346)

Likewi e, Harri on and Moore (2 009) investigates co-movement in stock index r tum between
em erging countries of Central and Eastern Europe (CEE) including Bulgaria Czech R epublic,
Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia, and Slovak Republic, and two
developed countries of W estern Europe (Gem1any and the UK) between 1994 and 2006 . In ord er
to addres the relati onship between stock markets of these countrie , they appl y a multi variat
7

BEKK-GA RCH (p . 15 14) model that e timates both mean-to-mean and

H model sta nds for B aba, ng le, Kraft and Kron er GAR H mod el.

11 I Page

arianc -to- ari ance

pillov r ffect o

r tim . Th ir r ult

u mi and Fatt urn (2014) a1 o d

a tim - n

AR H model approa h dev 1 p d by
con lation in t ck market and fiv
Neth rland
Kuwait

audi

market co-m
re pon e to
change

and Fran e) and £ ur

) t

il importing d
il-

p rting

ha tic (rand m)
m ur p .

untri

and th r maining two d

trend in to k index return b tw en

In a r c nt tudy

ugg t that ther i a c mmon t

analy i u mg

JR-D

timate dynamic c nditional

1 ped c untri e (

m rgmg c untrie

( nit d

Italy,

ermany,

rab

mirat

rabia and Venezu la) £i r a t n-y ar p ri d (2000 - 201 0). They find that "cro ment a m a ured by

nditi nal con lati n c

ignifi ant aggr gat d mand " (p.

re ulted from both

fficient incr a e po itiv ly in

05). In their analy i

upply and demand

ide

they con ider oil price

h cks £ r und er tanding the role of

commodity market on tock price chang . Their findings demon trate that oil prices and tock
prices tend to move to g ther with varying degree of trength in both imp rting and xporting
countrie . They find that wh n high oil prices are originated fr m suppl y hock , it doe not
always have a countercyclical impact on tock price in il importing countri es. How ever, in the
case of oil-expmiing countries, supply shocks will cau e higher correlation between oil price
and stock prices. Therefore, both co1nn1odity price

and cone ponding trading pattern

m

developed countries subsequently dete1n1ine stock market perfom1ance in em ergin g countries.

2. 1.2 Effect of global financial crisis on stock index returns
In another study, Filis et al. (2011) " investi gate the time-varying con elation between stock
market prices and oil pri ces for oi l exporting and oi l importin g countrie " (p. 152) applying
D

-GARCH-GJR model to analyze time varying conelation between oil and tock p1ice of

oil expo1iing ( anada, Mexico and Brazil) and oil impmiing (U

12 I Page

, Gern1any and Netherlands)

countrie

particularly in th

to k price and il pric

id

id n e that

f the n gm f th

irr p cti

nelation between lagg d oil pri ce and t
co-movem nt between t

nclude that c nditional vanance

b tween

do n t vary mu h b twe n il e p rting and oil imp 1-ting countri

But th ir con lation re ult pr
tock r turn

ri i p riod. Th y

il pric

il pri ce h
k pric

d m n trat a n gative ef:G ct

k. They, in parti ular find a J

n

itiv

durin g th gl bal financial ri i . H nee

k r tun1 and comm dity pric

can be exp cted durin g the period f

financial cri i .
Thi evid nee 1 al

upp 11 d by

corr lation m d 1 (i .e., D
commoditie and tock

reti t al. (20 1 ). Th author u e a dyna1ni c conditional

R H t

m e tiga te the link betw

v r th peri d Janu ary 3, 200 1 t

n pnce r tum :G r 25

ov mber 28, 20 11. Th ir result

how that during th 2007-200 financial cri i p ri d the c rr lati ons between cmnm dity and
tock return are highl y volatile. They al

menti n that c rrelati ns of

price ( e pecially oil, coffee and c co a price ) with

vera! comm oditi e '

&P 500 index return increase in time

f

increasing tock prices but they dinlini h in time of bearish financial market. In general, they
conclude that the 2007-2008 financial cn s1 played an important role m determinin g comovement between commodity and stock prices.
Using an advanced time- eries mod el (i.e., DCC- FIAP ARCH 8), Dimitriou et al. (20 13)
investigates fmancial contagion betw een BRICS and U .S. tock market return durin g global
financial crisis. They find a general patten1 of isolation in stock market located in the BRIC
countries during the early phase of the crisis p eriod, and a reemerged pattern in stock retum for
all these markets after the crisi period. They identify an increasing relation hip in tock retun1

ond itional
13 I Page

orrelati n-Fractiona ll y Integrated

ymm etric Povv r

b tw

d p nden
u

and th

n the BRI

. . mark t during th p

tw

R H-in-m - n m d 1 hi h

latility-t -m an and
n th BRI

and th M

untri

latility

and thr

I m rging mark t ind

k mark t had a p

had a n gati

ffi t

hand , had n

inOu en

mark thad a p

iti

n mi

iti e impact n t

111

a (2014)

am ng

e mark t wh r a th

hin e

ut

Rl

mark t .

uring th
111

en

p ri d, the

raziJ whil Japan e t

ignificantl y influ n ed Indi an mark t p rfi rmance. Finally, in the r c very pha ,

and the BRI

h y

k mark t. Th J pane e t ck market, n the

k market p rfi nna n

F d ro a (2014) b erved a tr ng p

k market

t- ri i p ri d

hin

razili an and

t

ermany J pan

luding

market nl inOu nc d

inDu n e n b th

f the

ffect

er

that the

timati n f m an-t -

fi r th

ri i and p

during th

nl y n Ru Ian
n an

pill

d

c nclud that in th pr -cri i peri d the
rman t

n lud

ilenk and

i larger in bulli h than in

a 4-dim n i nal B KK-

man,

p ri d and

t- ri

k market
i lenk and

iti e influ n e between th three devel p d t ck market

t ck market . The abo e findin g r pea tedl y ugg t that th e inter-relati n hip

among indi vidual

t ck market

betw en dev I ped and em rgmg c untri e

had been

ignificantl y changed during the gl bal fin ancial cri i in 2007-200 .

2.2 Relationship between stock index returns and macroeconomic indicator in developed and
developing countries
The relation hip between

tock return

and macroeco nomic va riabl e

ha

been

t n i

ly

di scussed over the pa t decad e but mo t ex i ting tudi e have e amined thi relation hip in th
c ntext of the U.S. and other advanced countri e .
(1990) have shown that st ck return
macr ec nomi c indi cator
14 I Page

are

arli er tudie like Fama (19 1) and

trongly and

uch a int r t rate,

ignificantl y r !at d t

hang rat , real

chw rt
dome tic

P, infla ti n rat , and

for ign tock mark t indic

run ng t ther .

variabl

xplain

are ub tantial t

m

f the e tudi

how that macr e onom1c

ru-iati n in annua l t ck retun1 .

urth r,

hw rt (19 0)

explain that information about future r al ec nomic acti ity may be r fle t d in st ck price
w 11 before it occur and a eti that chang
demand for inv stment go d .
impact on cun nt chang
relati n hip b tw

uch pre i u chang

m ind

r

ult in

hang

111

indi id ua l '

m to k ind x r tu111 might have an

r tu111 . Having pr vided a g neral

n t ck r tum and macr

cited in the following ub

in tock pric

v rv1 w

c nom1c a ti ity, p cific e ample

f the

have b en

cti n .

2. 2.1 Stock ind x r turns and macro

on om I indicator in d ,, lop d c untrie

Ace rding t th study carri d out by Bulma h and Trivoli ( 1991) on the relationship betw een
U. . tock market index and ome

lect d macr econ mi c ariabl e (i.e., M2 money

hort term

interest rate and long term int r t rate), the effect of conomic indicator on ind ex return
varies between the hort and long run . They find that th ere ex i t a po itive relation hip between
the U.S. stock market index and money supply (M2) in the short -run. In the long run, on the
other hand, a negative relationship exi t between index return and M2 as well a both hortand long-term interest rate . Lately Ratanapakorn and

hanna (2007) examine both short-term

and long-term relationships between the U.S. stock price index (S&P 500) and

tx

macroeconomic variables over the period 197 5:1-1999:4. They observe money supply, industrial
production, inflation, exchange rate, short-term interest rate, and long-te1m interest rate with the
S&P 500 index retmns and found a negative association with all variables in the long run . In the
shmi run, their findings indicate a negative relationship between stock index returns and
government bond yield and long-term interest rate while it is po itively related to money supply,
industrial production, inflation rate, exchange rate, short-tenn interes t rate, and Tr a ury bill rate.
15 I Page

Kim (2003) inve tigat

Lik wi

raJ economic

ariabl

inflati n . The tudy co
J han

n'

the long-1un r lati n hip b tw

tock pric

and

uch a indu trial pr du ti n r al exchang rat , int re t rat , and
r m nthly data £ r th p riod January 1974 to De 1nb r 1 9 .

ointegrati n anal

real e chang rat , intere t rat

i , th

r ult h

that t

k pric

i n gati

and inflati n but po itiv ly related t

ing a multivariate cointegrati n m th d 1 gy,

tun r lati n hip b twe n real t ck pri

haudhuri and mil

and m ea ure

pri at con umpti n, real money and real price of il in
quaJierly data from January 1960 t
and real price of oil ha

n U. .

the

indu trial pr du ction.

(2004) examine th long

f real activity including r al · DP, real
u tra]i an t ck m arket. Th

pril 1 9 . Th analy i

a negati e impact

I r lat d t

u1g

h w that real

tudy u e

DP real mon y

n to k price whil e r al private con umpti n i

po itively related to tock price . imil arl y, Humpe and Macmill an (2 009) applied co integration
analysis in ord er to m del the long-tenn relation hip b tw een indu trial producti n, con umer
tock price index, money uppl y and long term intere t rate , and tock p1i ces in the U .. and
Japan. They u ed monthl y data from 1965 to 2005 . They find con i tency with a

ingle

cointegrating vector in the U. . where a nega ti ve relationship ex i t between stock pri ces and
both consumer price index and long term intere t rate w hile a positi ve relation hip persi ts with
industrial production.

Furthennore, G1iffm and Stulz (2001) examine the importance of exchange rate and indu stry
competition for tock retu1ns using weekly data of industry indices from the U. . Canada,
United Kingdom France, Germany, and Japan from 1975 to 1997. They find that exchange rate
shocks have a trivial impact on individual returns of indu try indice in all ix indu tria lized
countries. Recentl y, Mallick and Assefa (201 3) stud y the dynami c betw een U . . tock returns
(S&P 500, Dow Jones, NASDAQ and Russell 2000) ba sed on wide range of info nnation and
16 I Page

t d rna ro

m

hang

latility ind

m d 1 t

flu tuati n

(VIX) int r

inilati n,
and

t rat

id ntify the fa t r

that influ nc

hange rat

itat d t!u· ugh hi gh er trad and

(n

m quity mark t and predi t d inflati n ha e
th ir

and

t

k return

1 1)

pti n

R 1-

h y a

rt that

DP hann 1 un

rtainty

p cted arnmg

f firm

1mp
hey a!

igni fi anti

B ard

cifi a ti n and M

daily

nega ti

n mic ari ab l

r tum and rna r

R H

hi ag

change rate ) D r th p ri d

apply b th

10

b twe n ind

(i .

ana

mb r 2011. Th

January 1

D

n mic and finan ial

nclud e that th

c rr lati n

nt fin anci 1 ri i in

hang d durin g the re

200 -200 .
2.2.2 Sto kind

r turn and ma ro

arli r tudi e ha

e amined th

dynami

m

ountri "S

m rgi ng market and have pr vi d d

wami and Jun g ( I

conclu i n . For in tanc
demon trat d the ffect

onom1 indi a tors in m 'r tn

f orne ec n mic fact r

7)

tud y K rean

tock m arket and

n the mark t u ing Ve tor

rr r

Model (VE M) . The el cted ample p eri d i fr m January 19 0 t June 1996.
their finding , the Korean tock price ar p
and

arymg

rr cti on

cco rdin g t

iti ve ly related to indu tri al pr du ction, infl ati on

hort-term intere t rate but negati ely related to 1 ng-tenn intere t rate and oil pric

Wongbangpo and

hanna (2002) al o

(i.e. money uppl y, gro

tudy the effect of elected m acr

national product, infl ati on, intere t rate, and

9

pnce in five AS AN countrie (Indon

ia , Malaysia, Philippine ,

con mt c

.

ariab le

change rate) on t ck
ingapore, and Thailand) .

They find a negative long run relation hip between stock pri ce

and intere t rate

Philippine ,

btained in Indone ia and

ingap re and Thailand while a p

M alay ia . In addition, the e change rate i p
9

A., ociation f outhea. t Asian Nation

17 I Page

iti ve relation hip i

iti vely corr lated with t

in th

k price in Indone ia,

Malay ia and the Philippin

but n gati ely r lat d in ingap r and Thailand .

witching

AR H mod 1

e chang rat

and tock r tum in four merging c untri

and M xi
that

hkili et al. (20 11) xan1ine the dynamic r lati n hip b tween

ignificant in1pact n t

Malay ia

(H ng K ng

) in A ia during b th n nnal and turbul nt p ri d . Th ir r ult pr

change rat ha

ing a Markov-

k mark t in the

id

vid nee

lected c untri e ; h wever,

thi r lation hip arie fr m n country t an th r.
Pilinku (2009) e amm

the relati n hip b tw en
dom

macro conomic variable including gr
rat , exchange rat , interbank
tock inde

f~ r d rat

( MXV) r tum incr a

rate . H e, how ver, find

tic pr du ct, M 1 m ney upply, un mpl yment

and c n urn r price inde . He finds that

du

upply while it fall a a r ult f decrea

ithuanian to k mark t and ix different

111

gro

ithu anian

dome ti c product and m ney

in unempl yment rate, exchange rate, and interbank

mixed evid nee in the ca e of change in inflati n. In a later tudy,

Pilinkus (2 0 10) consider how ten different m acroecon mic indicator influence stock market
performance in the Baltic

tates including E tonia (OMXT) Latvia ( MXR) , and Lithuania

(OMXV). Generally the author finds cau ality between a number of macroecon mi c va riabl e
and stock market indice in the Baltic

tates. He investigate both short tenn and long te1m

relationships using vector autoregre sion and Johansen multiple cointegration models ,
respectively. According to his findings, the combined effect of macroeconomic indicat r on
stock index returns, based on adjusted R -square, i explained by only 3 7 percent (Lithu ania),
39.9 percent (Latvia), and 36.4 percent (Estonia) in short-run while change

in economic

fundamentals explain almost 99 percent variations in index returns of all the e market in longrun. Therefore, hi

findings suggest a significant long-te1m impact of macroeconomic

performance on ind ex returns in an emerging country. Further analy i show that tock inde
18 I Page

retwn

have a

ignificant p

itive r lati n hip with t tal linp Ii and inflation while are

negatively af£ cted by hang

in r al

DP and

mark t a po itive r lation hip

i t betw

n ind

port in

t nia. In th ca

return and real

of Lithuania tock

DP imp Ii and h t-t

inter t rat whil a n gati

relati n hip p r i t with t tal v lum of expOii, and trad balanc

La tly, he find that increa

in r al

retwn in Latvia . In c ntra t, chang

P and trad balanc r ult in increa

in market ind ex

in inflati n and h rt-term inter t rat have a ignifi cant

negative impact on tock market p r£ nnanc in Latvia.

Using VE M mod l,
variable

and the

bayiro-

igerian capital mark t. Th

macroeconomic variabl
and money

amw nyi and

ag1e (20 12) examm

auth r

macroeconomic

c n ider the y arl y data of several

of int r t rat , inilati n ra t , xchange rate , fi cal defi cit,

uppl y from 1975 - 2005 . "The major finding i

influence tock m arket ind x in

DP ,

that m acroeco nomic variabl e

igerian econom y" (p . 55). Lik wi e, Maku and Atanda (2009)

al o tudy the relationship between the Nigerian

tock Exchange All hare Index pri ces and five

different macro economic variables from 1984 to 2007 . They u e annual tim e

eries data in their

analyses including the NSE index infl ation rate, Trea ury bill rate, exchange rate, broad money
supply and real economic output. Their results indicate that change in the

E all hare index

returns are consistentl y determined by changes in exchange rate inflation, money suppl y, and
real output both in shmi- and long-run in Nigeria. Precisely, increase in the magnitude fa ll
these vmiables decrease stock prices in the Nigerian stock market. R ecentl y, Eita (2012)
identifies the macroeconomic dete1minants of stock pnce

in Namibia using a VECM

econometric m ethodology for the period 1998-2009. The results exhibit that change inN amibian
stock prices can be explained by differences in economic activity, intere t rate, inflation, and
exchange rates.

19 I Page

Furthenn r
on Vi tname
They u

Narayan and Narayan (2010) c ndu tan in
t ck mark t pli

tigati non th impact of oil n

daily data for the p ri d 2000 -200 . Th y find that t ck price

exchange rat

ntr 1 variabl

. Th y on ider n minal x hange rate a a

ar co-integrated (th y ha

il pri

a long-run r lati n hip) and a

a dn

in 1

uch they find n ither

oil price nor xchange rate ha a ignifi ant ef£ ct n tock r tun1 in the h Ii run e timate.
u ing an error c n· cti n m d 1 th y, h wev r, find th at b th oil pric and
p

itive and ignifi ant impact on t

a g neral autoregre

IV

k pri

c nditi nal h t r

111

k da ticity (

n the ari abl

chang rat hav

i tnam in th long run . Th auth r al o build
R H 1 1) m del f t ck price a a

re ult of an AR H ffect in th r idual . T h re ult fr m the
abo ve ignificant r lati n hip b tw

y

R H m d l al o confin11 the

and t ck p rice . H owever, th y find that the

impact f d me tic fac tor i more d minant than il price chan ge in det flTlining ub equ ent
changes in Vietname e

tock mark t p r£ rm ance. Thi

macroeconomic variabl es in explaining th

movem ent

ignal

the imp rtance of own

f tock price in Vi etn am . In another

stud y, Ibrahim and Aziz (2003) u e co-integration and vector autoregr sion m ethod to analyze
the dynamic linkages betw een stock prices and fo ur macroeconomic vari ables (i.e., indu trial
production, money suppl y, con umer p1ice ind ex and exchange rate) for M alay ia. They use
monthl y data over the period 1977-1998 in their study. The results suggest that while industri al
production and consumer price ind ex are positively associated w ith ch anges in stock prices both
in short- and long-run, exchange rate i negatively associa ted with

tock price m ovements.

F inall y, Bu y uk~ al v arc 1 (20 10) examin e stock plice behavior of the Turkish stock market. He
considers several m acroeconomic vari able

including consumer price index, money market

interest rate, gold p1ice, indu strial production ind ex, oil pri ce, foreign e change rate, and money
suppl y in the study fo r the period 2003-201 0. The re ult sugge t that in rea e in int r t rate,

20 I Page

indu trial pr du ti n

and e

il pri

pn e

hang rat

in Turk

in th

h rea

in g n ral.

2.3 R elation hip between to k mark t p e1jorman e and conomic fundam ental in BRI
countrie
numb r

BRI

t

c untri e

f tudi

paratel

whil

fth BRI

th r ha

[! r

uth

ly affi ct d by r al

ne

r tw

an 1 z d all

Rl

c untri e

111

ne tudy.

amm e

price (u ing Johann

ind ex a a pr

DP growth rate, money upply,

AR H model, th

re lati on hip between
uppl y, and th e

that

h w that t ck market return are

h w

uth

ly influenc d by real 1 ngfrica ·

t ck mark t ind

y) ar affected by ch an g

in rea l

t ck mark t inde , go emment defic it, real intere t rate,

nominal effi ctive exchange rate, inflation rate, and
exponential

tudi

k ah alam (2000) wher the impa ct

P and r a! e chang rat but n ga ti

chang

and

P real e ch ang rate and int re t rate

u h a r al

amin d . Th ir re ult

t ck

[ the BRI

analyzed

t rm int r t rat . Likewi e, H ing (20 I I
burg

ariab l

ha

untri e includ J fferi and

frica i

n m1

m

mic ariable

on t ck pric

r lati n hip bet

dat .

me

po iti

ti ga t d th

111

k r turn

m
of

ha

re ult

o uth Africa'

government b nd yield .

ugge t that there ex1 t

toc k market pri e

tock market index pr.i e

and r a l

a

mg an

ignifi cant and po iti ve

DP growth rat , m oney

while a negative relation hip exi t with

th r

anal yzed variable . Alagidede and Panagiotidi s (20 10) a! o inve ti ga te the r lation hip betw
stock pri ce and inflation for elected African
Sou th Africa that in the

ho11 run, stock price

c n um er price ind ex while in the long run, a p
The auth r
21 I Page

tock m arket . They revea l in th eir r ult
how a tran itory n ga ti e re pon
itive re pon e

ugg t that stock are u uall y u ed t

n
for

to th

i t betwe n the two ariabl

h dge again t inflation in long run in th

.

outh Africa. In anoth r tudy Alam and Uddin (2009) xamm th r lation hip b tw
pnc

.
c
and mt
re t rate 1or
·fift
r een c untn.

January 19

m

utor gr

1

ba d

n monthly data fr m
( th r

ol mbia and Italy) that h w a n gati ve relati n hip forint re t rat with

Zha

c untJi

201 0)

tudies th

rea

in tock pric

chang

iv ) and multi ari ate

1v

how that there i n

eneralized

ut r gr

m

outh Africa.

dynamic relati n hip b tw en

hina and R enminbi (RMB ) r al ef[i cti e

( AR H) model . The period c
re ult

h ir analy i

implying that hi gh int r t rat r ult in d

Among other BRI
pn

.

t March 2003 . Th y b rv that outh Af1ica i am ng th D ur c untri

thr e ar Banglade h,
har pric

10

n t ck

rat

tock

u mg VAR (Vector

nditi naJ H teroskeda ticity

red in the tud y i fr m Janu ary 1 9 1 t June 2009. The

dir ct r Jation hip b twe n e change ra te and

tock m arket in

China.

Turning to the m arket of intere t a a group
several macroeconomic variables on BRI

ay (2008) examines the relationship between

(Brazil , Ru ia, Indi a and Chin a)

tock markets

during the period 1999-2 006. He appli e another tim e- erie model, th e Box-J nkins ARIMA ,
for thi s investi gation. The result shows evid ence of no significant relation hip between tock
market return and exchange rates as well a oil price . H e i of the opinion that thi

is not

unexpected as other international and dome tic m acroeconomic vari abl es like producti on,
inflation, and interest rates m ay have direct impact on stock price change a m acroeconomi c
indicators are also coiTelated to each other. Likew ise, Chkili and Nguyen (20 14) also ex a min
the relationship between stock markets and [! reign exchange markets in BRIC

countrie (South

Africa included). They use a M arkov switching vector autoregre ive m odel (M -V AR) to
investigate thi interaction between stock and fo r ign exchange m ark ts over the period 199710

Samp Ie countn.es are Au tra 11
·a, B angladesh, anada, hde,
.
Mex ico, Philippin e, outh Africa, pai n, and Venezuela.
22 I Page

olomb1.a, Germany, Italy, Jamaica, Japan Malaysia,

id n

that

regard le

f th

20 1 . Th y provid
BRI

c untli.e

e plained by th

hange rat chang

. Th y how v r pr po

U cti e h dging trat gi

d ri ati e lik curren y fi rward , futur

Thi

hapter ha att mpt d t pr

r lati n hip am ng d

m

tock ind x return , and macroec nomi c

1. There i

a

ba ic

v n new

f a number f r levant mpirical

el ped t ck mark t ' ind

ob ervati n from review ing the e tudi

r lation hip 1

and ption

Key observation fr om literatu re review
id

that thi

f

again t curr ncy ri k thr ugh availabl cutT ncy

2.4

tudi e on th

do n t affi ct tock mark t r turn

ari abl

f

r turn , em rg in g mark t '

n·e 1 nding countri es.

me criti aJ

ar a fi llow :

ignificant relati nship in

t ck pn ce m vements between devel ped,

particularly the U . . m ark t and m ergmg a w 11 a developing countrie .
2. Changes in country- p cific m acroecon mic indi cator play criti ca l role in detennining
m arket index returns. However, sel ctive economic indicator are critical in expl aining
such relation hip in specifi c group of countrie . For example m arket ind ex retun1s are
significantl y respon ive to chan ge in interest rate, and gro

dom e tic produ cts in some

BRIC S countri es.
3. Financial cri is influence the above relationshi p in index retum between developed
and em erging tock m arkets. None of the stud ies, however, did a comparative analysis to
detennine the link between U. S. index retun1s and emerging market index return in the
context of global versu region al financial crise .
4. To identify the und erl ying co-movement of index retun1 along with other indi

s and

economic fund amentals of a country, earli er tudie u e onl y tim - erie ana ly e , and

23 I Page

thu n ither
imultan

24 I Page

f them con id r both cro - ectional and c untry- 1 cific fi

u ly while

timating th abov r lation hip .

d

ffect

H PT ER THREE

r data and m th d 1 g

Thi chapt r
e plain th e

ur e

f data u

u d fi r th m d 1
m d 1 i pr

u

d .G r th

d and th data ana l

ti n and

nt d in e ti n

LY I

ND D TA

METHODOLO Y

th

i

ti n f thi ch apter

i . Th fir t

.2 and

c ti n

pr

nt th e ari able

tim ti n m e th d , r

p e ti ely.

n th e empiri al

cral di agn

t appli d

n th e m iri al m d 1 are

.4.

ti

t

plained, in e ti n .5 .

3.1 Sample data

The the i

(M

utiliz

I) data ba

A DA

11

data fr m fi ur maJ r
, Yah

Fin an

• M onthl y data

, W rid

fi r each BRI

index while data fi r

t

urce : the M rg n

k ind

ank '
untry i

( Y

W rid

tan! y

c n m1

lndi cat r

btai ned fr m th M
mp

itc ind x)

apital lnt rn ati nal

I

(2 01 4) and

m erg in g M arket

bta ined fr m Y ah

inance ' web ite . Data o n th e ma ro c nomi c fa

bta in ed fro m Wo rld Bank ' data ba e

(2014) except fo r exchange rate w hi ch i o btained fr m

A D A datab a e. A ll pri e .fl r th e

p an el data u ed are denominated in

. . d li ar .

In thi the i , m onthl y p anel data i empl oyed . T wo main data en e ar ind ex return of BRI
countri es and that of the U . .

tack m arket. M onthl y return

con idered a a proxy of tack m ark t p erfom1 an ce in BRI

f ea h of th e e indi ce

and the

. toc k m ark t . The

sampl e p eri od covered is from Janu ary 0 1, 1990 to D ec mber 3 1, 201 3 . Du e to m i ing data
26

ob erva tions acr

countri e over tim e, an un ba lanced p a n 1 data

to tal of 1,174 o b ervati on
11

[= (24 x 12 5) - 266].

ince

t

25 I Page

f

t i u ed c n isting a

k m arket p rforman e

AN DA is an on line fore1gn exchange company th at relea. e. dall y exc hange rate data.

ar

an be

influ n d

y c n mtc tatu

f a

mark t perfi rman e in g n raJ. I
n minal int re t rat

and e

untry m n y mark t

n id r thr

hang rat

indi idual ariabl

r p ti ely t pr
ariabl

fi 11 wing

ti n.

tw

captur the efD t f th

parat

2007-2 00

m luding

y fi r a h f the

mpiri cal m del are di

mark t .

h

u ed in th
n , t

gl bal finan cial
p n n d by BRI

e on m1

f pan 1 data in thi the i i du t it uniqu e ad antage

important ad antage f pan 1 data

DP gr wth rat ,

dumm y ariabl e are in lud d in the anal y

th r, t capture th efD t f finan ial n
Th choic

in th

hange

nditi n and D r ign

a a gr up .

er tim e en

data .

mp red t tim

n

that it

allow id entifi ati n f c rtain parameter with ut the n d t make re tri ti ve a umpti n . F r
xampl , panel data mak it p

ibl t analyze change

not only uitabl e t m del or

pl ain why indi vidual unit behav differentl y but al

why a given unit behav

n an individu al I vel. Panel data arc
t m del

differently at different tim . Pan 1 data are typi cally larger than cr

ectional or time eri e data et and e pl anatory ari abl e va ry ver tw dimen i n (individu al
and time) rather than one. Even with id enti cal ampl e ize , th u e of a panel data et will often
yield more effi cient e timation than a eries of ind epend ent cro s- ecti ns (Pradhan et al. ,
2003).

3.2 Variables for model selection
3.2. 1 U.S lock index return

The relationship in tock retu111 between d

eloped and emerging market i well d

urn nted

in many tudies. For e ampl e, Hwang et al. (2 01 3) and Ken urgio et al. (20 11 ) tud
relation hip and find that
26 I Page

tock return ha

th i

ignifi cant ffi ct n emergi ng tock market

r turn . Th ir r ul t

and

exhibit a

tr ng po iti e r lati n hip b tw

ndi ng

m rging mark t ' inde

ntagion

f£ ct betw n th

Kenourgio

t al. (20 11) find

mark t ( .. and

m

tud i

t ck 1nark t and

ha e

mark t .

t

k ind x r turn

and

am in d the d pendenc

m rging mark t .

id nee of finan cial c nta gi n

.K .) to the BRI

that aft r th 200 -2 009

r turn .

n

p cifically,

f:D ct fr m the two devel p d

o 1 y and Hutchi

n (2009) ar

f the p1m n

.. finan ial ri i , emergin g mark t have re po nd d " very tr ng ly t
imilar r ult i

the d t rio rating ituation" in th

mark t.

(2012) where the int mational tran mi

i n

tate on ace unt f the 200 - 2009

. financial cri i i

f t ck ptic

btain d in Xu and Hamon

between the BRI
ignificant.

UJT

and the United
nt evid ence h w
tock market .

Dimitriou et. al. (2013) and B kir

(20 14) h w that a ri e in international capital flow r ult

in an increa ingly po itive relati n hip in sto ck returns between the BRI
Thi relation hip is observed mo tl y after the
that

outh Africa'

toc k market inde

index ptice. They argue that the

and the U. . markets.

. . financial cri is. Likewise, Hsing (2011) find

price is po iti ve ly influenced by the
toc k market index price cau e a ri

. tock market
1n

o uth Africa'

stock market index price du e to it capital flow s and thus bring abou t positive effect in r tum .
Following the previous studies, I use monthly NYSE (New York Stock Exchange) index return
data as a proxy for U. S. stock market perf01mance and expect a positive impact of the

Y E

index p erfom1ance on BRICS index returns . The monthly in dex returns are calcul ated a the
difference b etween current month-end index price and previous month-end tock price divided
by previous month-end index price.

27 I Page

3.2.2

DP rowth rat

Real c n nile acti ity
tim

horizon. In an

plain a larg r fracti n

f variati n in t ck market return for longer

arli r tudy

ama ( 1990) rep 1i that change in the rate of production

gr wth ignificantly increa e th

ariati n in both monthly and annual t ck r turn of N w

Y rk

to k

critical influence
COIT

R m n la (1990) h w that r al d m e tic gr wth rat

chang . Lik
n

c

t ck mark t retUin

have

m d v 1 p d c untries . U ing r lling-

lation analy i , Ly k a (20 14) fmc! that alth ugh the growth-r tum relati n hip i po itiv

in the case of everal c ntral and
varie during the p eriod

a t rn

urop an ec nomie , the tr ngth

f fin ancial cri i . In the cont xt

(20 13) al o find that the relation hip betwe n t

f

D c untri

everal

financial

rv1 ce grow , which i directly ti d t

1989) . Given that BRI

M ad en et al .

k retu111 and c nomic growth i

th r pap er argue th at financial devel pment mcreas

po itive.

f thi relationship

ignificantl y

a the dem and :.[! r

eco nomi c grow th of a c untry (e.g.,

tern,

econom1e are growing at a hi gh rate compar ed to man y developed

countri es it is exp ected that uch positive growth in economic acti viti es result in high demand
for investments in BRI S stock m arket

and thus incurs positive ind ex retutns in th e e m arkets.

For instance, Jeffe1is and Okeahalam (2000) study the relati onship between tock return and
selected macro economi c variabl es for three African economies including South Afri ca. They
find that South A fri can index returns are positively affected by its GDP growth rate.

imilar

evidence is also found in the case of South Afri ca by Hsing (2 0 11 ). I, therefore, con ici er GDP
grow th as a criti cal indicator to dete1mine stock market index perfmm ance for BRIC

countries

and exp ect a positive relationship betw een them . I m ea ure this vari able a (GDP in year t - GDP

28 I P a g P

n

in y ar t-1)1 DP in y ar t-1 whi h i
annual rat

rted t

y th numb r f m nth in a y ar.

DP gr wth rat by

1 iding th

12

aminal int r t rat

.2.3

f n minal int r t rat
impa t f inter t rat

n t

fl r fin an ial mark t

tudi

ha e

amin d th

r mpha iz d in n

ann t b

pr

k m ark t indi

p li ie

d that t ck pric

n my. Thi i b

)

au

( lam and

ddin 200 ).

amme

ent en d

and

number

f th

ariabl e and

am ng the m o t influential ari abl

many tudi

f

t ck m arket
untri

are c integrat d with I ng t nn int re t rat in each c untry.
me

th

1mp rtant impli ati n [! r g vernm nt

n n minal int re t rat

int IT lati n hip b

(2011 ) and H ing (20 11 ) are
el ct d m acro conomi c

id

nd m n tary p licie

retum . F r in tanc , H ara ty and R ul t 2
ho

m nthly

and

hinzara

that exa min e the re lati n hip between

t ck pri ce . T he tudi

indica t

that int re t rat

i

that play a r 1 in af~ cting t ck market in an emerging

economy. Empirical tudi e exhibit that th r

m g neral, an inver e r lati n hip between

tock price and int rest rate. For exampl e, u ing a tru c tu ra l V ARm del, H ing (2 0 14) find th at
stock prices increa ed in

tonian tock market du e to decrea e in

first quarter of 2000 and third qu arter of 201 3.
Jefferi

and

ther tud ie con i tent w ith thi findin g includ e

keahalam (2000), Pimentel and

other . T he e papers con ider

ome of th

studie . According to them , an increa
those countri es. S me th r tudie

wn int re t rate durin g th e

houd ry (20 14) Fifield et al. (2 002) am ng t

BRI

c untrie

( outh

fri ca, Brazil ) in the ir

in nom in al intere t rat decrea e

tock ind ex retum in

ho wever, report mixed evidence n th relati on hip b tw een

t ck market return and intere t rate for di fferent ec n mi e . For in tan e, W ngbangpo and
harma (2 002)
12

bserved that a n gative long run relati on hip e i t betw

maintain consistency in tim e interva l across indi v1du I

29 I Page

n tock pri

and

mgap r and Thailand whil a p

inter t rat :D r Philippin

n int r t rate and t

r lati n hip b t
n lu i e - dif:D r fr m

111

RJ

each

[! r

ignal imp rt nt hange in th internati nal trad e patt rn

fan

w rid

hang rat

. . d li ar d pr c iat
a

n m1 Indi at r .

k pri c

(appr ciat

their t tal e p rt increa

u

a rol

Pr vi u

m rea

t

have empirical!

hange
111

n rall y wh n

(de r a e ) in pr fit , c mp any'

f

chang rate fl x ibility

(e .g. Phylakti

and Ravazz I , 2005).

gree

to play in detem1inin g
tudi e

Zha , 201 ).

e l are lik ly to ri e (fall) in e p rt- ri ented

, pr fit I

tock price al o tart inc rea ing (dec rea
ha

m nthly int r

Iu

ank· W rid

econ my and u h in:D nn ati n i th n tran mitt d t

firm

return

kind

rat

A han ge in th

th

d in

t rat

untr . In thi th

untry t

untr , btain d fr m th

.2. 4 Ex han

b er

iti e relati n hip i

e ti ga t d thi

relati n hip between th e dom e ti c

t ck

market and th :D r ign xchange market. Whil e

m e f them have [! und e id ence f a negative

relation hip other have, how ever, reported n

relati n hip between th e e tw

example, Kim (2003) consid er
detem1ine it

impact on

everal det nninant including real

tock pri ce m

number of foreign cunency unit

per

m arket .

. . doll ar exchange rate to

em ent . The auth or m ea ures exchange rate a
.. doll ar

or

the

th at a ri ing exchange rate m an

appreciation of the d llar. He find a negative relation between

. . tock price and

. . doll ar

exchange rate . The author argu es that investor want to shi ft from foreig n to Ameri can tock ,
thereby putting pre ure
pri ce

n the dollar exchange rate to appreciate. Thi cau e m

to increase. Likewi e,

orne

th er recent

tudi e

ha e found a negati

. . equit y
relation hip

betw een exchange rate flu ctuation and tock retmn in em erging m arket (e.g., H ing, 2011 ;
Ba her, Haug, and
30 I Page

ardo ky, 2 0 12). In contra t,

hi ang and Yang (200 ) in

ti gate the

r lation hip b twe n to k r turn and cwT n y alu
of a po itive relati n hip in all market . Th y m a w·
xpr

opinion that relativ

tock r turn v latility efD cti

c m

)p r

ly ummariz

. . d llar. Th y ar

f

BRI

find n

t ck market .

exchange rat . H i

ay (200 ) al

f th

change rat m v m nt i not
relati n hip b twe n BRI

pini n that thi i n tun

like producti n inflati n, and int r t rat

future tock pric

inc the e e on mic indica t r ar

change the

ffect of foreign exchange rat

hkili and

ignificant for all
t ck mark ts and

pected a other international and dome tic

macro conomic variabl
and

f the

r lativ mark t ri k which i

n at d by the p culati e pr fit fr m th for ign xchange market. How v r,

Nguyen (20 14) h w that the impa t

id nee

change rat a w ekly Friday clo ing

d in national currency unit (N

qu tation which ar

ian market and find

D r nin

ha e a role in detennining

al o influenced by exchange rate

on t ck price m v m nt i captur d by tho e

macroeconomic fundam ental . Therefor , I find inc nclu ive evidence about the effect of
exchange rate flu ctu ation on st ck r tum aero

indi vi du al countries. Fo llowing ea rli er studi es,

monthl y exchange rate is mea ured a each co untry'

currency per U.. do ll ar in thi s thes i ,

obtained from the OANDA databa e.

3.2.5 Financial crisis

The Federal Reserve Board of St. Loui (2 009) and the Bank fo r International ettl em ent (2009)
identify four different phases of the most recent global financial crisi . According to the e
studies, the timeline of the global fmancial crisis is categorized into four pha

. Ph a e 1 i

described as " initial finan cial turmoil" which span fro m 1 August 2007 to 15

eptember 2008.

Phase 2 i defi ned as 'sharp financial market deterioration" and pan s from 16 eptember 2008
to 31 Dece mber 2008 . Pha se 3 is identifi ed a " ma croeco nomic deteri orati on", whi ch pans from
I January 2009 to 3 1 March 2009. Fina ll y, Pha e 4 i consid ered a an episode of" tabilization
31 I Page

and t ntativ

1gn

f reco

ry ' (gen rall y r D rred a p

April 200 to March 2010 wh n equity pri
Man uri 2014). In mo t tudi

t-cri i p ri d) whi h pan fr m 1

around th w rld gain d trongly

( .g., Dimitriou t al. 201 ; B kir

, 2014·

1

(Mighri and

yll ignaki and

Koureta , 2011· A1oui et al., 20 11 am ng t oth r) th cri i period i h w vera umed to b
th tim frame co
the i

ring th fir t thre pha e (from 1

I identify the global financial

Rl I i equal to 1 if any m nth f th

2009, 0

therwi e.

financial

hock durin g the

om

f th

BRI

amp!

ugu t 20 7 t

1 March 200 ). In thi

by a dummy variable (

RI I ). By d finiti n,

ampl p ri d lie in between

ugu t 2007 and March

c untri

imilar typ

ri i

al o e perienced

p n d. The maj r financial en

of adver e

that hit BRI

t ck

market are as follow :

Brazil: Introduction of the new Brazilian currency, R al, on Jul y 1 1994 was expected to put an
end to high inflation that aU cted their ec n my ov r the previou thr e d cade . It wa expected
to be fixed at 1:1 with the U .. dollar, but un[i tiunately it suffered a udd en devaluation to a rate
of about 2:1 in 1998 (Pinheiro et al. , 2001 ). The beginning of thi cri i wa followed by high
gross extetnal debt to about US$228 billion (over 28 percent of GDP) by mid-1998 according to
IMF report (November 1998). Toward the end of

ovember 1999 the Brazilian economy began

to recover and forei gn direct investment increased after the devaluation to a high of 2000
(Evangelist and Sathe, 2006). In the thesis, I identify the country- p ecifi c financial cri sis period
for Brazil from July 1998 to November 1999.

Russia: As of August 17, 1998, the Russian currency crisis and default of Ru ian government
bonds, also known as Ruble cri i or the Russian Flu, hit the country and forced the gove1nment
to devalue the cunency, Ruble (Wiel , 2013) . The cri i wa , however, for a sh 11er period of
13

Refer to 20 10 Bank oflnternational

32 I Page

ttlem e nt (Annua l Report) .

ery wa partly b

time nding

ruary f th fi U

il pri

when Ru ia e p ri need a large trad

in 1

mg y ar.

IMF and W rid Bank h lp d th

Ru ian

India : The n 1 that affi t d m
mark t. Th
(Ken urgi u

t part

1an finan ial e n 1
t. al., 2011 ). Th

n 1

Thai baht due t lack [ fi r ign

[

ugu t 1

bruary 1

h d

tart d July 1 97

urr n

10

rder t

f ca h by

id ntify th

ffe t

n the Indian t ck

ri ginat d fr m

hailand

rnm nt wa fi r ed t fl at th

ta11ed wh n th e Thai g

hang

of th n c m w rld

re

ian market aJ

which

au

urplu . Furth r, an infu i n

c n my t

ifi financial ri i p ri d fi r Ru ia fr m

c untry- p

the th

hi r

upJ 11 it fi ed e chang rate. ln

i , I id entify c untry- pecific finan ial ri i p ri d fi r India fr m July 1997 t

ebruary

199 .

Chin a:

hina a1 o

p rienced a maj r finan ial cri

that tarted July 1997 (Ken urg10u

t. al. , 20 11 ). Th

the cri i due to it large fi r ign inve tm ent. B y

a a r

[ th

ian finan cial cri i

hine e ec n my wa hi ghly impacted by

ebru ary 199 , financial interventi n fr m th

IMF and the World Bank re t red mark t c nfid ence in
e pecially Thailand . A a re ult,

ult

me

f th

affected c untri e ,

hina al o reco ered from th en 1 at that time .In th e th e i , I

identify country-sp ecific financial cri i for

hina from July 1997 to February 1998 .

South Africa: According to Bhundia and Ricci (2005), the cunency cri e
of April 1998 to the end of Augu t 199

and again in b tween

pread fr m th e end

eptember 200 1 and De ember

200 1. In another tudy, Aron and Muellbau r (2005) identify everal currency cri e in February
1996, in

ctob er 1996, November 1997 and

"event" a a cutTency en 1 .

33 I P a g

pril 1998. How ver, th ey d not con ider th 200 1

Data r

ahno t at th

am tim b tw

xperienced th ir r pectiv finan ial cri e

m rgmg c untri

al that mo t f th

n 1997 and 1999

cri i oc urr d fl r a hort p ri d

xc pt outh Africa wher a

f time during th

p cific financial cri e a a clu t r f indi idu al n
th e c untri . In mpirical m d 1 , I captur

nd of 200 1. H nee I con id r BRI
that happ ned during th

. By d finition,

1 if any m nth

finan ial cri i in a parti ular c untry a
market in

rune tim in all

uch a common peri d of financial cri e that

were fac d by BRI
qu al t

ond financial

f the ample peri d bel ng to th
tated ab ve, 0 otherwi e.

or exampl e, ince st ck

hina were adver ly affected fr m Jul y 1997 t F bru ary 1998

hina equal to 1 fl r the e month

0 otherw i

m nth of a

for

in ca e of hina.

3.3 Estimation method
Ti1ne series regre ion model have been widely u d in e timating the relati on hip betwe n
tock market returns and macroeconomic variable in previous studi e . Thi thesi has employed
panel regression method . The coeffi cient

f all variable includ ed in empirical model are

initially estunated con idering both fixed and rand om effects . The general pooled OLS ( rdinary
Least Squares) method which ha no country- pecific attri bute in the regression or universal
effect acros time is also included in the the is to understand whether index return aero
BRICS countries are ignificantly different among these countri es. In this regard , country
dummy variables are included in the model.

3.3.1 Fixed effects method
This method is simply a linear regression model 111 which the intercept term
individual units, i . It can be repre ented a
34 I Page

vary over th

(3. 1)

t=l , ... T
T¥h r Yil = th d p nd nt variabl ;

Jl 1 = individual effi ct of a h unit,·
X 11 = th ind p ndent variabl

/]= th r gr

ion param

i and tare indi ce :D r indi idual unit and tim e, re p ctively.

It i u ually a umed that all X 1 ar ind pend nt
cone ntrat

fa ll £ 11 •

nti all y, th fixed effects model

on di fferences 'w ithin ' group (Verb ek 2000) .The parametri c a umpti on about

Jhmpo e that a change in X 1 ha the arne ffec t whether it i a change from one peri od to the
other or a change from one individual variabl e to the oth r (Verbeek, 2000).

3. 3.2 R andom effect method

Generally it is assumed that all factors that affect the dependent variable in a regre sion analy is,
but have not been included as regressor , can be appropriately surmnarized by a random error
tenn. This leads to the assumption that the /] 1 are random factors, independentl y and id enticall y
distributed over individuals. Therefore, the random effects m odels can be written as :

t= 1, ... T

(3 .2)

Where (a i+£i1) is treated as an error tenn con i ting of two component : an indi idual unit
specific component that does not vary over time and a remainder component that is assumed to
be uncorrelated over time. This implies that all correlation of the error term
35 I Page

ov r tim

a i (Verb

attribut d t th indi idual f£ ct
that th c mp

impli

it

k 2000 pp. 15). Th

rr r term (ai+ cit)

rror c mpon nt

tructure

hibit a particular .D rm of autocorrelation.

ince it i a umed that a i and € 11 are mutually ind p nd nt and id nti al of X1s (£ r all j and s),
the

L

e timator [! r f.1 and

computed tandard n r £ r th
Lea t quare ( L )
vi w 14 tati tical

/3 fr m ( .2) i unbia ed and c n i tent. H w er, r utinely
1

L

e timat r ar mc IT ct. H nee a m re effi i nt

n ral

timat r can b obtain d fr m random ffect method (Verb ek 2000) .

ftware i u ed to e timate the c

ffici nt f paramet r in the mod 1 .

3.4 Empirical model
In order t examine th

ffect f the

market performance,

everal r gr

. . tock market and financial cri

pecifications are e timated for robu to e

n the BRI

m del

have been estimated. Different mod el

check

f our finding . Each p cification include

control variable to ab orb country- pecific difference in macro conomic, money market, and
foreign exchange market performances over time. Literature

how

that

low diffusion of

information is a leading cause of the lead-lag effect in tock retu111 (Hou, 2007;

ebka, 2008).

Hence one-month lag of BRICS stock index return are al o included in empirica l mod els. AI o
an interaction term between the U .S. stock ind ex returns and the global financial cri is
included in the models so as to determine how the U .S stock market perfonnance during the
global financial cri sis affected BRICS index retmns . On the contrary, an interaction tem1
between the U.S . stock index retun1s and BRICS -specific cri es is consid ered in ord r to ab orb
the role of U .S. stock market during the period of BRI S-specific cri es. A general model that i
used in the paper is defined a follow s:

14

I
-v1. ews so ft ware 1. prov1"ded t1rough
the portal of th e Univ rsity of No rt h rn Briti h olumbi a (

36 I Page

B ), anada.

M odell: Based on the U.S. g lobal financial cri i
r~,~ =f3o + fJ,

fJrr£

'IN E 1. 1 + /32

H 1.1 + f3 7ru-l

E

*

1U '/, ) 1.1 /34

P R1.1

f3 5l Tu

+

(3.4.1)

£1.1

M odel 2: Ba ed on BRJCS- :pecific finan cial cri e

/12BRJ
H 1.1

- 1U E 1.1 fJJ(

EX*BRJ

R 1.1

.4.2)

f3 7r1.t-l+ £1.1

Model 3: Ba ed on both U.S. and BRI
r1.t =fJo + fJ,
(J5(U I DEX*BRI

-,:pe ific fin ancial cri e,

1.1 + /34(
E *E
/3NEX, f~. l + /39ru -t+ cu

- Rl

Wh r :

USINDEX, ,1 r pre

£CRISIS~,~ repre

nt

.S. to ·kind x r turn at m onth I,

nts a dummy variable capturin g lobal.finan cial crisi at month t

BRI S-CRISES1.1 repr en/ dummy variable captu6ng BRJ S cri e at rnonth t

USINDEXu*ECRJSISu i an interaction term bern·een the US.

tock index return and g loba l

finan cial crisi at month t

USINDEX, ,t *BRJCS-CRISES1.t is an interaction term betvt·een th e U.S.
BRICS- p ecifi crises at month t

DPGRu represents GDP g rowth rate of each co un11y at month I

INTu r pres nts nominal interest rate of ach country at month t

37 I Page

lock index return

and

£)(1 '}[,./,1 r ·nr
1:"

- han

rat p r U.S. dollar of each ount1y at nwnth t

ru-J r pr ent on -month lag

For robu tne

f my finding

d ind x r turn ofth BRJ S to k mart tat nwnth t

an alt rnati e

growth rate i includ d in th ab
(exp rt in y art - exp rt in y ar t-1) I

ariabl

( e p rt gr wth rat ) in tead

f

DP

mod 1 . The e port growth rat i initially m a ur d a :
p 11 in y ar t-1 and th n, i con

rt d to monthly export

gr wth rate by di iding the annual rat by th number of m nth in a y ar.
te t of empirical finding ar al o c nduct d a di

vera! r bu tne

u ed in the D llowing chapter.

3. 5 Diagnostic test
It i important to know which of th pan 1 r gr

ion method be t explains the objective of thi

the i . Thi i why orne pecifi cation test will be carried out to determine the best method .
Hau man (1978) sugge t d a te t for the null hyp the es of panel data that ~~ and /3 1 are
unconelated. The general idea of a Hausman te t i that two e timator are compared: one which
is consistent under both the null and alternative hypothesis and
typically efficient) under the null hypothe i only. A

ne which i con i tent (and

ignificant difference between the two

estimators indicates that the null hypothesis i unlikely to hold . The Hausman test is u ed in this
thesis, thus tests whether the fixed effects and random effect

estimator are

ignificantly

different. This thesis uses OLS e timator and thus R -squared will be u ed to compute goodne of-fit. The accuracy of the models ' specifications is also examined. F-statistics cone ponding to
a null hypothesis that th proposed regression models fit the data well is therefor comput d D r
each model specification.

ther preliminary te ts that are carried out on the data eries include

normality test (by observing the Jarque-Bera va lu e ) and panel unit root te t (by lin, Pe aran and
Shin, 2003). It i necessary to carry out the unit r ot test
38 I Page

o a to d termine if the pan 1 data

n

ar n n- tati nary. Th e te t ar catTl d out and di cu ed in th next chapter of thi

the i .

39 I Page

CHAPTER FOUR
EMPIRICAL RE ULT

Thi s chapt r pr

nt r ult

f th

mpirical analy i ba d on the panel data et highli ghted in

chapter 3. Th frr t

ti n of tlli chapt r pre nt b th d cripti e tati tic of th pan 1 data

and graphical r pr

ntati n

f BRI

con lati n betwe n m nthl y ind
macro e onomic indicat r .
p ecification and

and

r tun1 :D r BRl

ecti n 4.

cti on 4.4 pr

t ck ind ex r turns.

ide

pr

nt

and

ecti n 4 .2

t ck m ark t a w 11 a

regre Jon output

how
elect d

with different mod 1

unun ary f fi nding .

4.1 De criptive Statistic
Table 4.1 report

urnn1ary tati tic of monthly panel data u ed in thi

hows the panel data
4.1, BRIC

th esis whil e Figure 1

ri es plot of index retun1s ( INDEX and U IND X). As hown in tabl e

tock index return (SIND EX) have a m ean value of 0.0 11 , which is larger than that

of the U S stock index returns (U INDEX) of 0.007 . This implie that inve ting in BRI S stock
markets generates rugher returns to inve tor . However the level of ri k in investing in the e
markets is also ru gher than that of the U. S. market (0 .104 versus 0.044). Data al o reveal that
while in vestors' range of return from in vestm ent in BRJ C stock markets va ri e from -39 .4% to
54.7%, return on investment flu ctuates in between -19 .5% and 11.4% in case of the U .. market.
This finding coincid e with the principle of risk-return trade off, ugge ting that higher r tum
from investment in the BRIC S stock market are also followed by higher potential risk involv d
in these em erging m arkets.

40 I Page

Table 4.1: Summary statistic of monthly panel data

INDEX

U INDEX

GDPGR

EXP GR

INT

EX H

Mean

0.011

0.007

.450

0.011

1.707

140.228

Maximum

0.547

0.114

1.1 7

0.076

22.477

5942 .919

Minimum

-0. 94

-0.195

-0.

2

-0.02

0.167

0.961

td. Dev.

0.104

0.044

0. 27

0.014

1.998

804.244

kewness

0.171

-0.791

-0. 40

0.62

4.1 5

6.434

Kurto is

5.414

4.949

.7 19

6.70

3. 969

42 .719

Ob ervation

11 74

11 74

11 74

11 74

11 74

1174

The m ea ure of kewn

h w

that th

(GDP R) are n gatively kewed and thu
the right. From ob erving the exce

kurt

t ck ind ex return

and

DP growth rate

kewed to the left w hil e ther variable are kew ed t
i (which i ab ve

), th

leptokurtic beh avior is

apparent in all e1ie and more vid nt fat tail in exchange rate ( X H). Thi s impli e that the
panel data eri e are not non11ally di tribut d. Thi i not urpti ing given that the pan el data
have been con tructed by compiling financial and economic data fr m fi ve dif:D rent emergin g
countrie with distinctive characteri stic . Further, the Jarque-Bera (JB ) te t tati tics rej ect the
normality of the distribution for index return eri e . The panel unit root test i al o used to check
if stock index return series are stationary by applying IP S (Im, Pe aran and Shin, 2003) panel
unit root test. This test allows for hetero geneity in intercepts as well as slope coeffi cient
(Pradhan et al. 201 3). The IPS unit root test verifies the null hypothe i of unit root for ind ex
return series in the panel. The values in the statistics allow for the rejection of the null hypothe i
at the 1% level of significance implying that all re turn seri es are stationary. A

uch, lag return

seri es is considered while estimating coeffi cients of empiri cal model . Hetero keda ticity
con i tent coeffi cients have also been estimated fo r empirical model

41 I Page

1gur 1 pr
u

nt the pJ t

f t

k ind

d her [t r indi iduaJ c untry

a t

ind

r tum

n

a

the

ampl

p n d.

m

tably

t whi h

Brazil , India , Ru
time.

h w the p ri d

h wn in th graph
a h

an b a

f the BRI

pa1ti ular p int in tim . F r e ampl
mark t th

r tun1 fl r th BRI

uth

JJne

ne pl t i

f Iinan ial ri i . High fluctuati n m

ciat d with indi idual
c untrie

th 1

untry ri i during

rien ed finan ial en 1 at a

ian financial cri i affected

ignifi antly affl t d

ia and

c untri e .

hine

hine e ec n m y during that peri d.

frica e p rien ed high t ck return

ikew i

latility during th

am

ountry- p ci fi c tudy rep rt that ri k f p tcntial in e tm nt in all BRI
, and thi

that parti cular time ar
3.2.5) .D ata r

a

ith th 1r

ciated

al that th e tand ard de iati n

un ce1tainty in th e e market at

wn financial pr blem

f BRI

ind

(a

tated in

ection

return incr a

d fr m 7.9% in

1995 - 1996 to 13.5% in 1997- 199 .

al

reflected in the graph , BRl

ind ex return

flu ctuated ignificantl y during th e period

f gl bal financial cri i in 2007-200

- the tand ard

de iation of BRI
200 . Thi

index return

ugge t that financial cri i in th e

performance in the BRI

42 I Page

erie in rea ed fr m 7.5% in 2005-2006 to 11 .6% in 2007-

c untrie .

. . ha al o a ub cquent impact on t ck market

Figure 1: Tim e en e di tribution of in de return en e of BRICS countries
RUSSIA

BRAZIL
6

6

l

4

V)

z

V)

z

0::

::>

~i

0::

0

0

~

-2

-4
92

94

96

98

00

04

02

06

08

10

-2

-4

90

2

92

94

96

98

00

02

YEAR

YEAR

INDIA

CH INA

4

5T

3

41

V)

0::

0::

ljj

ljj

z

z

2

::>

::>

j

0::

0::

0

1:)

0

0
~

-1

-1

-2

-2

-3

-3

90

92

94

96

98

00

04

02

06

08

10

12

90

92

YEAR

SOUTH AFRICA
3
2

(/)

z

0::

f-

0

UJ

0::

1:)

-1

0

~

-2
-.3

-4
90

92

94

96

98

00

02

YEAR

43 I Page

04

06

08

10

12

'"I"' I " "'i"'l"''"'l"'l"'l"l"'l"'l"l"'l"'l"l''l"'l"'l"'lj
94
96
98
00
02
04
06
08
10
12

YE AR

::::>

04

l
*

3-i

2
V)

0
~

0

-6
90

1:)

2

0::

2

ljj

1:)

4

06

08

10

12

4. 2 Correlation between BRJCS index return

U. S. index returns and macroeconomtc

variables

Tabl

4.2 below

h w

the

ariabl
relation hip

in luding
me

n BRI

return . Th

. . ind

f th e varia bl

t ck ind

r in tan e, BRI

ignifi cantly and p

iti ely con lated with the

t ck inde

con lati n i 0.551

ignificant at th

mark t mo e t gether in th

doe well other t ck market in th
economic indi a tor , e change rate i
BRI

return

c n lati n

.

BRI

am ng

rr lati n b tw

and individual

h w

ignificant

tock ind x return

ar

r tun1 . The c rre ponding

1% 1 el, ugg ting that t ck r tutTI in b th

. . and

am directi n . In th r wo rd , if the U. . tock mark t
als

BRI

perf01m well and vice v r a. Among all

ignificantly c rr ]a ted wi th index return in both U. . and

market and thu foreign e chang mark t play an imp rtant r le t d tetmin p t ntial

retutns on investment in tock market. Given the fac t that fore ign capital fl ows between the U ..
and BRICS markets are incr a ing over tim , uch interaction between two market is not
unlikely. Correlation estimation al o rev al that individual macroeconomic variable are highl y
correlated. For example export growth

ignificantly and negatively conelated with both

interest rate and exchange rate ( -0.248 and -0.171

ignificant at 1% level, respectively) but m o t

strongly and positively con elated with GDP growth rate (0 .648 , signifi cant at the 1% level) of an
economy. GDPGR, on the other hand, i negatively conelated with interest rate (INT) and
exchange rate (EXCH) at -48% and -25.6%, respectively. Thi implies that overall perf01mance

f

th m ney market and foreign exchange market is critical for economi c growth of a country.

Likewise, the latter two market are also connected to each another as the correlation between
INT and

X H is found positive and significant at the 1% 1 vel (i .e., conelation i 0.435) . In

summary, it can therefore be argued that economi c performanc
44 I Page

of a country,

olume of

nun dity trading acti iti
p

in b th m ney market and foreign

xchang

market c uld b

ibl e planation for und r tanding t ck mark t p 1fmman e, in g neral.

Table 4.2: Correlation between m onthly BRICS tock index return and macroeconomic
Variable

INDEX USINDEX

GDPGR

EXP GR

INT

EXCH

1.000

U INDEX

0.551 ***
(22 .620)

1.000

GDPGR

0.045
(1.55

0.0 2
(1.094)

1.000

EXP GR

-0 .026
(-0. 79)

-0.0 1
-1.05 )

0.64 ***
(29 .101)

1.000

INT

0.095***
(3 .255)

0.044
(1.507)

-0.4 0***
( - 1 .722)

-0 .248***
(-8 .765)

1.000

EXCH

-0 .0 2***
(-2 .803)

-0 .069***
(-2 .366)

-0 .256***
(-9 .081)

-0 .17 1***
(-5.937)

0.435***
(16 .536)

1.000

*** ,** , and * indi cate th e Signifi can ce of each pair of co rrelat1 on at th e I %,5%, and I 0% level, respecti ve ly.

4.3 R egression results
A number of models have been estimated for the purpose of this the is in order to obtain accurate
basis for the relationship between BRlCS index retu111s and U .. stock index retu111 . The result
are estimated based on three regression methods which are: pooled ordinary least quare, fixed
effects and random effect panel regression methods . The estimated coeffi cients, t- tatistic , Fstati tics, and Hausman test are also pre ented in the tables.

45 I Page

Table 4.3: Panel Regression (BRIC ): Global Financial Cri is versus BRIC -specific
financial ri es U ing Pooled OL
Variable

PAN EL A: U.S. GLOBAL
FINANCIAL CRISIS
MODEL3
MODEL 1 MODEL2
MODEL4

PANE L B: BRJ

FINAN IAL

RJ E

MODEL 5

MODEL 6

MODEL 7

MODELS

1 DE

1.3 52***
(22. 65)

1.346***
(22.53 )

I. 09***
( 19.5 )

1.297 ***
( 19.356)

I .322***
(22.854)

I. 15** *
(22 .732)

I .270***
(2 1.298 )

I .264***
(2 1.1 82)

Rll

0.020**
(2.203)

0.020**
(2 .225)

0.025**
(2 .550)

0.025***
(2.6~ 7)

-

-

-

-

- Rl

-

-

-

-

-0.0 15
(- 1.28 1)

-0.0 19*
(- 1.60 1)

-0.025 **
(-2.068 )

-0.028**
(-2 .376)

-

-

0.212
( 1.426)

0.23 *
( 1 604)

-

-

-

-

u l DE *
- Rl

-

-

-

-

-

-

0.757***
(3 .3 1 I)

0.750***
(3 .285)

GDPGR

0.0 14
( I . 162)

-

0.01
( 1.051)

-

0.0 14
( I 120)

-

0.0 15
( I .2 17)

-

EXP GR

-

-0.273
(- I .404)

-

-0.29
(-1.504)

-

-0.323*
(-1.643)

-

-0.325*
(- 1.659)

lNT

-0 .000
(-0 .085)

-0.00 I
(-0 .587)

0.000
(-0 . 102)

-0.00 I
(-0 .591)

0.000
(0 . 180)

0.000
(-0.227)

0.000
(0 . 182)

0.000
(-0.248)

EXC H

0.000**
(2 .223)

0.000**
(2 .005)

0.000**
(2.232)

0.000**
(2.022)

0 .000*
(1 .927)

0.000*
( 1 .639)

0.000**
(2 .008)

0.000*
( 1.706)

INDEX(- I)

0.031
( I .267)

0.030
( 1.224)

0.02
( 1.14 3)

0.026
( 1.079)

0.025
(1.031)

0.023
(0 .967)

0.026
( 1.079)

0.024
( I .0 15)

Brazil

0.003
(0 .302)

0.006
(0 .638)

0.003
(0.3 13)

0.006
(0 .647)

0.005
(0.457)

0.008
(0 .837)

0.005
(0 .54 1)

0.009
(0 .935)

Ru ssia

0.008
(0 .896)

0.0 11
( 1.284)

0.008
(0 .9 14)

0.011
( 1.298)

0.00
(1 .004)

0.0 12
( 1.430)

0.008
(0 .933)

0.012
( 1.377)

India

-0.005
(-0.527)

0.002
(0 .2 17)

-0.004
(-0.480)

0.002
(0 .235)

-0 .004
(-0.423)

0.003
(0 .375)

-0 .004
(-0.49 1)

0.003
(0.350)

China

-0.0 14
(- 1.349)

-0.003
(-0.390)

-0.0 13
(- 1.277)

-0 .00
(-0 .364)

-0.0 13
( -1.220)

-0.00 I
(-0.170)

-0 .0 14
(- 1.307)

-0.002
(-0. 196)

CONSTANT

-0.005
(-0 .713)

0.00 1
(0 .245)

-0.004
(-0.590)

0.002
(0 .353)

-0.003
(-0.496)

0.003
(0 .5 14)

-0 .003
(-0.493)

0.003
(0 .57 )

ampl e size

11 74

11 74

11 74

11 74

1174

11 74

11 74

11 74

R-Sq uare

0.32

0.32

0.32

0.32

0.32

0.32

0 .32

0. 2

F- tati stics

55 .298***

55 .390***

50 .50 1***

50 .6 57***

54 .826***

55 .039***

51.267***

51.439***

BRI

1 D X*

RJI

BRI

***, **, and * mdJcate the stgmfi cance of each coeffictent at the l %, 5%, and 10% level, respectively . T-, tati , ttcs
are given in the parenth e e .

46 I Page

Table 4.3 pr

nts regr

ion output u ing po led

ba e country. The table i di id d into two
Pan 1A in lude e timat d c

L r gre ion m thod and

uth

frica a a

cti n ba ed on two individual type of cri e .

fficient of individual variabl

u ing th U . . financial cri i a a

proxy £ r global fmancial cri i , and Panel B r p rt
financial cri e . For all m del
BRI

ind x r turn i

it i evid nt that the r lation hip b tw

n U .. inde returns and

ignificant and po itiv at th e 1% level. Thi implie that ind ex r turn in

both market move in the am directi n and thu there i a ub equ ent effect from the U . .
mark t to BRI

tock market .

an

panel A i 1.3 52, uggesting that 1% increa
retw11s of BRI

ampl , th c efficient of U lND X in mod 1 1 of
10

. . ind e

ind x. The re ults al o exhibit that

model in panel A . Thi impli e that inde r tum in BRI
recent global fmancial c1i i

in the

return re ult in 1.352% increa e in
Rl I

is po itively ignificant in all

tock m arket increa ed during th

. . compared to n n-cri si

BRICS -CRISES instead of E RISIS and exhib it

that BRI

peri od . Panel B includ es
ind ex retun1

are adver ely

affected during the peri od of own BRIC - pecifi c financial cri es compared to other non-cri i
peri ods (the coeffi cient of BRIC -CRI E

varies from -0.019 to -0.028). In model 3 and 4 of

panel A (7 and 8 in panel B), I consider an interaction te1m between U .S. stock index retum and
financial crises (either U SJNDEX *ECRISIS or USINDEX*BRIC -CRISES). Estimated re ults
show that the coefficient of USINDEX *BRICS-CRISES is always highly significant and
positively coiTelated with BRICS ind ex retu rns. For exmnple, as shown in model 7 in panel B,
1% increase in USINDEX returns resulted in 0.757% in crease in BRICS index retun1 durin g the
period of financial cri is in respective countries compared to non-crisis periods, significa nt at the
1% level. On the contrary, similar model pecifica tion, as shown in model 3 of panel A, xhibit
that the coefficient of U INDEX*E RISIS i insigni ficant, sugge ting that change in U .. inde

47 I Page

. . frnancial cri i did not ha

r tuTn during th
BRI

any ignificant impact n ind x r turn rn

countri .

Furth nnore

among t the fl ur

cmT ncy ha

a p

con m1c vmiabl , exchange rat

all m d 1 pecificati n . Thou gh the c

ignifi ant a ro
conmnically negligible thi

wn macr

1

iti e impact

ignifi ant at th 1% 1

fficient of

1

1

1, ugg ting that depr ciation f local

n d m e tic index r tum

f BRI

countrie . Thi

unlikely given that a 1 cal urr ncy depreciate , d m tic t ck b om
inve tor . Due t lm·ge for ign capital infl w

( X H)

cunent d mand fl r d m

1

not

cheap r to foreign

tic stock increa es and

thus stock price begin to ri e. N nethele , th evidence ugge t that the ub equ ent effect of
local curr n y d preciation on return on inve tm nt in t ck mark t i minimal in ca e of
BRI

countri

. Finally BRI

- pe ific dumm y variable

sugge ting that tock ind ex return in BRI
A

uch, I consider return of all BRI

are alway

fo und insignificant,

are not ignificantl y different from each another.
ind ice

together in a panel data set, clustered by

individual co untry to di tingui h the respon ive ness of emergin g stock markets ' perfo rm ance to
both global and BRI S- pecific fin ancial crise .

48 I Page

Table 4.4: Panel Regression (BRI
Effect Methods

): Global Financial

MOD L2

MOD EL 1
ariable

n

1

U ing Fi ed and Random

MOD • L 4

MOD L 3

FIXED
EFFECTS

RA NDOM
EFFECTS

Fi XED
EFFECTS

RANDOM
EFFECTS

FiXED
EFFECTS

RANDOM
EFFECTS

FIXED
EFFECTS

RANDOM
EFFECTs_

D

1.352***
(22.6 5)

1.349***
( 16. 07)

I . 46***
(22.532)

I. 41 ***
( I . 158)

1. 09***
(I 9.56 )

1.299***
( 14 .0 I )

1.297***
( J 9.356)

1.286***
( I . 34)

RJI

0.020**
(2.203)

0.020
( 1.5 3)

0.020**
(2.225)

o.o:w
( 1.549)

0.025**
(2 .550)

0.026*
(1 .895 )

0.025***
(2.627)

0.026*
(I .892)

-

-

-

-

0.2 12
(1.426)

0.251
( 1.2 16)

0.238
( 1.604)

0.27 1
( I . 06)

0.014
(1.162)

-0 004
( -0.532)

-

-

0.0 13
( 1.051)

-0.005
(-0 .577)

-

-

-

-

-0.27
(-I .404)

-0.46 1**
(-2. 168)

-

-

-0.293
(- 1.504)

-0.475**
(-2 .2 2)

INT

0.000
(-0 .085)

0.000
(0 .237)

-0.00 I
( -0 .5 7)

0 000
(0 .127)

0.000
( -0. 102)

0.000
(0 .22 )

-0.00 I
(-0 .591)

0.000
(0 . 122)

EXC H

0.000**
(2.223)

0.000***
(3 .487)

0.000**
(2 .005)

0.000***
(3 .349)

0.000**
(2 .232)

0.000***
( .50 I)

0.000* *
(2.022)

0.000***
(3 .36 1)

INDEX(- 1)

0.03 1
(1 .267)

-0.003
(-0 . 11 I)

0.030
( 1.224)

-0. 06
( -0.225

0.02
( 1. 14 3)

-0.005
(-0 . 194)

0.026
( 1.079)

-0.008
(-0.3 15)

CON TANT

-0 .007
(-0 .906)

0.001
(0 . 134)

0.004
(0 .8 7)

0.005
(0 .8 87)

-0.006
(-0 .753)

0.002
(0 .248)

Sa mple size

1174

1174

1174

1174

1] 74

] 174

1174

l] 74

R-Square

0.32

0.20

0.32

0.20

0.32

0.20

0.32

0.20

55 .298***

48 .804***

55 .390***

49 .338***

50.501 ***

42 .000***

50.657***

42.530***

Hausman
Test
(p-va lu e)

-

14. 137***
(0 .007)

-

16.226***
(0.003)

-

13 .258***
(0 .0 I 0)

-

15 .365***
(0 .004)

Co un tryspecific
Effects

B-0 .005
R-0 .009
l-(0 .003)
C-(0 .0 12)
S-0 .002

I

I D X*
E RJI

GDPGR

E P GR

F-S tati tics

***,**,* Imply the

B-0 .003
R-0 .008
J-(0 .00 I)
C-(0 .006)
S-(0.003)

0.005
( I .026)

B-0.005
B-0 .003
R-0.009
R -0 .008
1-(0.003)
l -(0 .00 I)
C-(0 .0 12)
-(0 .006)
S-0 .002
S-(0.003)
Igmficance of each coefficient at the 1%, 5% and 10% level, re pectively. T- tatiStic

corre ponding to coefficients are in parenthe is.

49 I Page

0.005
(I .040)

Tabl 4.4 pre ent

timated r ult u ing fi ed and random f~ ct panel r gr

Tlu tabl ha four mod 1 p cification capturing th
BRI

index return . The con

ion method .

f~ ct of global financial cri i

n th

ntional Hau man t t i carri d ut D r all m del pecificati n .

The t t tati tic varie fr m 1 .2 5 in m d 1 t 16.226 in mod el 2

ignificant at th 1% 1 v 1,

ugg ting that fixed effect m th d i an appr p1iat m d 1 pecificati n for e timating the
coefficient of individual model .

imilar t

th

r ult in tabl 4. , the relation hip betw

U. . tock index return and BRI

[! und

1% lev 1, repeatedly ugg ting that ind e r turn of b th

. . and BRI

arne direction and thu
market. A the r ult

ther i a ub equ nt

ffi ct from the

ugge t, the global financial c1i i (

n

ignificant and po itiv at the
mark t m v in the

. . market to BRI

RI I ) i

stock

ignificant in all model

pecificati n u ing fixed efD ct meth d. F r e ampl , m del 3 exhibit that durin g th e global
financial cri is BRIC

tock index return increa ed . The coefficient valu e uggests that BRI

stock index return were increa ed by 0.025% during the period of U. . global finan cial cri i
compared to non-cri is period . Re ults al

how that the coefficient of (U INDEX*E RI I ) is

insignificant sugge ting that decrease in

index returns did not have any adver e effect on

BRICS index returns. In addition, exchange rate (EXCH) is the only macroeconomic vari abl e
that is found significant under both fixed and rand on1 effects. How ever, the coefficient of EX H
presents no economic value. It however proposes that depreciation of local currency ha po itive
effect on current stock index returns of BRI S countries. Till i con i tent with the finding of
Chiang and Yang (2003).The insignificant interest rate (INT) is consi tent with the finding of
Binti et. al (20 11 ).

50 I Page

Table 4.5: Panel Regre sion (BRIC): Global Financial Cri i U ing Fixed Effects Method
Variable

MOD L I

MOD L2

MOD L3

MOD E L4

I D

I .404***
( 19.709)

I. 96***
( 19.558)

1.372***
(17 . 153)

I .357***
(1 6.9 17)

RJI

0.022**
( 1.97 )

0.022**
( 1.984)

0.025* *
(2 . 15 1)

0.026***
(2 ._20)

Rl J

-

-

0. 155
(0 .878)

0. 187
( 1.059)

DP R

0.0 15
( I . I 09)

-

0.0 14
( 1.044)

-

-

-0 .33
(- 1.521)

-

-0 .354
(-1.588)

INT

0.000
(0 .0 0)

-0 .00 I
( -0.425)

0.000
(0 .068)

-0 .00 I
(-0.429)

EX H

0.000**
( 1.966)

0.000*
( 1.721)

0.000**
( 1.973)

0.000*
( 1.734)

INDEX(- I)

0.040
( I .462)

0 .039
(I 407)

0.038
( 1.383)

0.036
( 1.307)

C O N TAN T

-0 .009
(-0 .965)

0 .005
(0 847)

Sa mpl e size

920

920

920

920

R-S quare

0.3 1

0 .31

0.3 1

0.3 1

F- ta ti s ti cs

46 .955***

47 . 131***

42.326***

42.536***

Ha usma n T es t
(p-valu e)

13.422***
(0 .00 )

14 133***
(0 .007)

12.878***
(0 .0 12)

13.585***
(0 .00 )

C ountry-s pecifi c Effec ts

B- 0.005
R- 0.0 10
1- (0 .002)
C-(0 .0 11)

B- 0.002
R- 0.007
1- (0 .002)
C- (0 .006)

B- 0.005
R-0 .0 10
1- (0 .002)
-(0 .0 11)

B- 0 .002
R- 0.007
1- (0 .002)
- (0 .006)

u IN D

EX P -

*

R

-0 .008
(-0 . Tl)

0 .006
(0 .950)

***,**,* imply th e signifi cance of each coefficient at the 1%, 5% and 10% le el, respectively . T-stattsttcs
co rresponding to coefficient are in parenthe is.

51 I Page

Tabl 4.5 pre ent

irnilar model p cifi ati n a in table 4.4 u ing only fix d effect method

ince Hau man t t indicat

that the m thod i appropria te for e timating the coefficient of

indi idual model . Th e timation re ult obtain d here, how ver, xclude outh African data in
th pan 1 data et.

me

outh

frica b came a member of BRI

know whether th pre wu finding in tabl 4.4 are
new member country alm
b tween BRI

and po itive. Thi

mehow influenced due to inclu ion of a

tat the nd of ur ampl p riod . The c

ind x return (without
ugg t that

uth

fri ca) and

en aft r excluding

in 2010, it i imp rtant to

ffi ient

f the relation hip

. . index returns remain ignifi cant

uth Africa

tock inde return in other

four emerging countrie al o exhibit ignifi cantl y hi gher return wh n ind ex returns increa e in
the U. . stock market. F r ex ampl e m del 1 h w that a percentag increa
return re ult in 1.404% increa e in BRI
coeffi cient of ECRI I remain

in U. . ind ex

ind x return . imil ar to the finding in Table 4.4, the

ignificantly po itive acros all m del pecification

ugge ting

that BRIC index returns ind eed improved dmi ng the cri is time comp ared to non-crisis period in
the U .S. This is not unlikely given that when the U .. stock market underperform ed particularly
during the crisis period in 2007 -2008, American inve tors' holding of foreign stock
significantly increased, and other foreign inve tors also became cautious for inve ting in the U .
stock market. On the contrary, BRIC stock markets became abl e to attract more foreign investor
to invest in their stocks during that time. As a re ult, there was a high d mand of BRIC stocks,
and this resulted in subsequent upward pressure on stock prices. As such, it is likely that market
index returns improve in BRIC tock markets when the alternative market, whi ch i the U .. in
this case, went through fin ancial unce1iainty. The re ult fUiiher hows that the interaction ten11
between U.S. stock ind ex returns and global fi nancial crisis (U INDEX*

RI I ) und er fix ed

effects method is insignifi cant across all models. This suggest that a decrease in U . . tock

52 I Page

ind x r turn during th ir financial cri i peri d c uld not adver ely affi ct BRI

index r tum

during that time. In general, th abo e finding in table 4.5 are imilar to the finding u ing

BRI

a a group f m erging ount1i

. Tlm

xclu i n of

uth

fri ca from the ampl do

n t change th BRI - . . index retutn relati n hip and th impa t

BRl

mark t ' p rD rman e. Thi

f th U. . cri i on the

id nee al o upp011 my pr viou findings u ing BRI

The la t tabl of th r gre

n output in thi the i i pre ented in table 4.6 where fix d effi cts

m thod i appli d on m d

pecifica ti n that includ e b th gl bal fin ancial cri i and BRI

p cific financial cri

53 I Page

imultaneou ly.

Table 4.6: Panel Regre ion (BRI ): Global Financial
Financial ri e U ing Fixed Effect Method
ariables

MOD

I D

Rl I

-

BRI

Rl
I

D

1

M D

2

M

3

D

M

D

4

l D

I. 15***

1.270***

1.264***

1.2

***

1.226***

(22 . 54)

(22.7 2)

(2 1.298)

(2 1. 1 2)

( 17.724)

( 17.5 16)

-

-

-

-

0.023**

0 .024**

(2.402)

(2.456)

-0 0 15

-0 .0 19*

-0 025**

-0 .028**

-0 .024**

-0.027**

(- I 2 I)

(- 1.60 1)

( -2.06 )

(-2 . 76)

(- 1 977)

(-2 .287)

0.2 4*

0. I I**

-

-

*

-

BRI
Rl

0 0 14

DP R

XP-

R

MOD L6

I. 2 1***

*

Rl I

MOD LS

( 1.120)

-

-0 . 23*
(-1 .643)

-

-

( I. 900)

(2 .090)

0.757***

0.750***

0.7 7***

0.7 8***

(3

(

2 5)

(3 .407)

(3.4 15)

II)

0 0 15
( 1.217)

-

-0 325*
(- 1.659)

0.0 12
-

(I 0 18)

-

-0 .342*
(- 1.747)

0.000

0 000

0 000

0 000

0.000

0.000

(0 . 180)

( -0 227)

(0 . 1 2)

(-0.248)

(0 .200)

(-0. 195)

0.000*

0 .000*

0.000**

0.000*

0 .000**

0.000*

( 1.927)

( 1.639)

(2 008)

( I 706)

(2.050)

( 1.770)

0.025

0.023

0 026

0 024

0 027

0.024

(1.03 1)

(0 .967)

(I .079)

(J.Cll5)

( 1.094)

( 1.006)

-0 .004

0.007

-0.005

0.00

-0.005

0.006

ON TA T

(-0 .588)

( I 503)

(-0.622)

(I .5 8)

(-0.643)

( I .302)

Sample size

1174

11 74

1174

1174

1174

11 74

R-Square

0.32

0.32

0.32

0 32

0.32

0.33

F-Statistics

54 .826***

55 .039***

51 .267***

51.439***

44 . 12 ***

44 .360***

Hau man
Te t (p-valuc)

19.558***

22. 30***

21 .6 ***

25 . 179***

20 . 126***

2 .60 ***

(0 .002)

0.000

(0 .00 I)

0.000

(0 .003)

(0 00 I)

Countrypecific
Effects

B- 0.006

B-0 .004

B- 0.007

B-0 .005

B- 0.006

B- 0.005

R- 0.009

R-0 .008

R- 0.009

R-0 .007

R- 0.009

R- 0.007

1- (0 .003)

1-(0.00 I)

1- (0 .003)

1-(0 .00 I)

1- (0 .003)

1- (0 .00 1)

-(0 .012)

-(0.005)

-(0 .012)

-(0 .006)

-(0 .0 11)

- (0 .005)

-0 .00 I

-(0.004)

-0 .001

-(0 004)

-0 .00 1

-(0 .004)

I 1T

H

I DEX(-1)

***, **, * 1mpl y the s1gmfica nce of eac h coefficient at the 1°'o, 5°'o and 10°'o level, resp ctively. T -stat1sttcs
correspo nd ing to coefficient are in pare nth e is.

54 I Page

Ta 1 4 . pre nt

I find a p

Al

1% le

1a

fr m 1.22
p

iti

imilar e iden e a

iti

f

influ n

b rv d in pr

high a

relation hip i

th r are

. . t

u r gre

1

in m d l

b

1

1

k index return

n BRI

n re ult . Th c

ffici nt

n

[ K n urgt

. . and BRI

t

gl bal financ ial cri i (

RI I

al

F r

ifi ati n

e hibit th at the return

ampl , m del p

0.024% during the gl bal financial
indicat
p cific financial cri

f thi r lati n hip range

1. 2 1 in m d 1 1 (under fi ed ef.fi ct e timati n) . Thi

ith the finding

l ar c nta gi n effi ct b tw

i u table u ing fi ed ffi ct m th d .

ed in pr

et al. (2011) ugg

k market . The ignificance of
and p

mpar d t

that BRI

tin g that

f BRI

t

itively ignifi cant.

k ind ex increa

n n- ri i peri od.

n th e

d by

th er hand ,

retum are nega ti ely influ enc d by BRI
ignificant and nega ti ve.

. Th

return decrea ed by 0.027%

exa mpl , m d l p ci fi cati n 6 indicate that BRI
during the peri d of financial cri e in BRI

an

ec nomic relative t n n-cri i p riod in tho e
in ignificant in mod l 1, the coefficient

till negative. In addition, the effect i fi und highly ignificant (up to 5% 1 v 1) in a ll other
model pecification . Thi

implie that when there are financia l market cri e

in the BRI

countri e , stock market perform ance ignificantly deteriorate in the e economie .

Furthenn re, the interaction terms for both U .. global financial cri i (

IND X*

RI 1 )

tock ind x return are
found ignificant. Model 5 an d 6 include both (U IND X*E RI I ) and (U IND X*BRI
RIS S) indicating that BRI

stock index r turn move in the arne direction a

return change durin g th e peri d of financial cri i regardle
or exampl e, m del 6 exhibit that 1% incrca e (decrea

55 I Page

) f

. . index

of the actual origin of the cri ·i .

. . inde return

au ed 0. ll 0 o

. . financial cri i wh rea 1%

ck ind x during the
(d crea e) in

r tum r ult d in 0.78 % in r a e (d cr a ) in BRI

.. ind

f BRI

retun1 during th p ri d

financial cri

. Thi impli e that wh n BRI

index
c untries

xp ri nee th 1r wn finan ial cri
r p ct to

. t

k r turn than it d e during th p ri d f

t aJ. (20 13 ), BRI

Dimitri u

' ec n mi

de ad

f gr wth, accumul ated high level

urplu

and thu the imp act

f

have built up

. . finan cial cri i . A argued by
tr ng c n urn r demand after a

f fo r ign exchang r erv

. . financial cri i i minimal.

and ignifi cant budget

vid nee obtained on both

fin ancial c1i
b th variable and e hibit the arn e r lati n hip a D und in m d I 6. The ab ve findin g al o
. . tock market p rfi rrn well during any BRI

ugge t that if the
BRI

tock market perfo rmance can be le

coeffi cient of (

BRI

affected by I ca l cri i . A

index return

is

an example, the

) are 0.3 11 and 0.788,

IND X *

respectively in m del 6. Thi impli

- pecifi c financial cri

that th positive impac t of inc rea e in U. . ind ex return on

ignificantl y higher in the ca e of BRI

- p cifi c financial cri e

compared to U. S. cri i (0.788 ver u 0.311 ). Hence, investing in the U .. market durin g the
period of dome tic fmancial cri se can be beneficial if the U. . stock market perform well
during this time. Given the fac t that the U .. index u ua ll y und erperforrn
economy experience own financial crisi , the downfall of BRIC

when th

U ..

index return durin g thi time

is more likely (i .e., the coefficient is po itive) . Therefore, when comparing the con equence of
U.S. versus BRI S- pecific fi nancia l cri es on index returns, the re ult
in U.S.

tock 1 ortfoli o by BRI

inve tors

ugge t that inve tment

relatively beneficia l wh n BRI

experience their wn fin ancial cri e but th U. . tock mark t p rforn1 we ll.

56 I Page

countrie

amtrung th
( XP

f£ ct of macr ec n mtc variable

r veal

that b th

port growth rat

R) and exchang rat ( X H) ha
all m d 1 . Th

l. A

t tal

ctor , and thu
entitie

p rt

c

ffici nt fl r

XP

f a c untry gr w

R i

tm nt in

ituati n.

quent 1 w demand fl r d m

tment incr a

ar

e pect d to fall gtv n that a maJ r fra ti n

f

.

ignificant at 10%
in export- ri nt d

them hi gh r return on

t ck p rtf! lio inve tm nt

k by c rp

ti

and

return

rt d t p t1fl li inve tm nt by c rp rate

f 1 w v lume

ub

coeffi cient of X H i

in

p rt ri nt d indu trie pr vid

a r ult

corp rate bodi e 1n em rgmg c untri

h w v r, n gativ

c rp rat

am unt f m n y i u uall y di

ince r al fi ed in

in e tm nt 111 thi

t ck ind

and

th ind ex pri ce and retutn
f p rtf! li

mv tm ent

ind e d d ne by

urther a indi ca ted in all model p cificati n

th

c n mi call y negli gible but i hi ghl y ignificant at th e l 0% level. Thi

ugge t that depreciation of local currency ha a po itive impact on dome tic ind x r tum
BRI

countrie . Thi

i

f

c n i tent with Hwang et al. (20 13) where exchange rates have

ignificant and po itive effect on tock retutn in em rging c untries.
(local cunency depreciate ), BRI

U .S. dollar apprec iate

tock become ch aper in the eye of Ameri can inve tor

becau e one dollar is worth one more loca l currency. In thi ca e, if the overall demand fo r
BRI S stock increase , tock price ri e du e to upward d m and hi ft of BRI
fin ally results in increase in BRI S index return .

57 I Page

stock . Thi

4.4 S ummary of Finding
Thi

hapt r ha pr

111

r turn and

nt d an u r gr
kind

n th r lati n hip b twe n BRI

n utput

numb r f r ult ha

r tum.

d 1 pe ifi ati n ar £i und
th fi llowing c n lu 1 n
I. Th r

1

a d n the findin g ab

an b drawn :

a ignifi ant p iti

u h

been pre nt d and the re ult

IT

lati n b t e n

t ck market p r.G m1an

matter

. and BRI

ind ex return .

a I t in d t tmining BRI

mark t

f fin ancial ma rk t c nditi n during b th ri i and

per.G rman e. Thi i tru rcgardl e
n n-cri i peri d .

2. Th ugh c untry- p ifi c financial h ck ha
p rtfi li r tum in BRI

a

ignificant nega ti ve impac t

id nee h w that BRI

n

t ck

ck market wa n t adver ely

. . financial cri i compared t

affi cted during th

p ri d of th e r ent

peri d. Henc ,

. t ck could be a good choice al ng with BRI

..

n n-cn 1

st ck in tock

portfolio el ti n.
3. The effect of the

index retum

. . ind ex n BRI

ignifi cantl y hi gher during the

time of dome tic financial cri e in BRI

countrie compared to U .. finan ial cri i .

H wever, higher ind ex returns are likely if

. . market perform well during the p riod

of financial crise in BRI
4. Po itive correlation b tween BRI
U.S. cri i

p ri d

ay

that BRI

index return and
portfolio mv

. . ind ex return e en du rin g th
xp n ence

inve tment during the U. . financia l en 1 a the U. . inde
during thi time.

58 I Page

return on

u ually underpcr.G rm

CHAPTER FIVE
ON LU ION
5.1 Finding and policy recomm endations
Pa t tudie pr

id

id n

f the r lati n hip b tw en BRI

t ck return and

. . tock

r tmn u ing time eri

data. Thi the i ha

amined thi intriguing relation hip u ing pan 1

data and a

id ed fmdin g ba d

n panel r gr

al

u h ha pr

e amin d th

mark t

whil

f th

th r

ha

recent gl bal finan ial cri i

analyz d th

- p

ific cri e hav b

effect of change in
BRI

f 2007 -2 00

ffec t of c untry- p ecifi c cri

t ck market . In thi

BRI

ion m ethod .

n c n id er d imultan

m

tudie hav

n BRI
the

tan

the i , both global financial cri

and

u ly. In

uch a

tock

rd er to control for ub equent

c n mic perfonnan ce, mon y market, and foreign exchange market on

tock market p er£ rmanc , thr e macr eco nomic indicator including GDP gr wth rate

intere t rate, and exchange rate are

mpl y d in empirical model . This empirica l analysis i

conducted u ing monthly data of a ample period from 1990 to 2013 . For robustne
thesi include

finding

ba ed on

tock index return of BRI

result using export growth in tead of

check , the

in tead of BRI

co untrie ,

DP growth as a pr xy varia bl e of economi c perform ance

of BRI S countri e , and finding based on different model pecification . A pecificati n te t
u ed to investi gate the adequacy of the tati tical model (Hau man test) how that fi ed effect
regre sion m ethod is an approptiate specifi cation.

Several ignificant re ult are obtained from thi

thesi . Fir t, index r tu1n of BRI

to k

markets are significantly depend ent on U .. index return . Re ult rep atedly how a po itiv
correlation between the e two indi ces,
NY

and BRI

59 I Page

ugge ting that there i a trong relati n hip bet\ ecn

t ck mark t . Imp rtantl y, thi

finding ugg t that retutn on inv

tm nt in

BRI

tock market incr a e when the NY

to-one po iti e r lation b tween U .. and BRI

market perform

ati factorily. Due to their one-

tock market

inve tor can elect tock from

both em rging and d vel p d market a thi arrangement of a et allocation hould increa e
total return on portfolio inve tm nt.
af~ ct d during the p riod

ec nd BRI

tock inde

return wa not adv r ely

f the r cent U. . finan cial cri i compar d to non-cri i peri d in the

U. . economy. E timated re ults how that a po itive a ociation exi t between BRI
return and U. . inde r tun1

n during the

the fa ct that it i po ible for BRI
m tock when th

m

. . to k mark t'

index

. . financial cri is period. Tlli finding point to
t

ean1 relatively le s return on their inve tm ent

p r~ rm ance dec lin e whi ch i most likely during the

time of financial downfall. Hence a clo e monit ring of U. . fin ancial market i critical for
BRI

inve tor who pre~ r to inve t in t ck . Finall y, the re ults reveal that during the time of

dome tic financial cri i

in BRI

signifi cant po itive impact on BRIC

countri e

a positive return of U. S. stock index has a

ind ex return. The higher return i , however, likely if the

U.S. stock market perform s well during the time when BRICS countri e are go ing through their
own fmancial problem . This in inuate that potential gain for p rtfolio investor who have
invested in both American and BRIC stocks can be realized if and onl y if the U. S. tock market
performs well during the period of domestic fm ancial crisis in BRICS countties. Therefore, how
the U. S. stock market is perfmming during a financia l crisis that matters a lot for BRI S
investors since BRICS index returns are positively and significantl y correlated with the U.S.
index retu1ns. This finding repeatedly suggests that stock inve t rs in BRICS should keep track
of the U.S. stock market perfonnance on regular basis to predict future retUins on in
BRI S stocks.

60 I Page

stment in

An th r imp rtant ftnding in th i th
n

111

n rally am ng th

k mark t indi

t

nth innu nc of BRI

p rt gr wth ar t

ignifi ant ariabl

hang mark t and

mm

BRI

untri e . Th

ity trad

in e t in new ly

d m

nc1

tic

UIT

ignifica nt gr

a

m

part

m rgmg

f th ir

t

h

I cal cun·ency alu and gr

that fi r ign

hi impli

k market inv

nd e

a need .fl r intemati nal fund

that th r

t ck mark t t

th in m rging t ck market

in g v mm nt agen i ) h uld al

el p ecifi cati n .

play imp rtant r le in d t nnining t ck mark t return

m iri al r ult

mana g r wh

nomic indicat r , xchange rate and

eva luate th

lability

tm ent deci i n . In order t

th regulat ry b di
r t

alue and

f

en ur

(.fl r in tan ce, poli y maker

put in place n ce ary m a ur

in fav r

f

th in e

5.2 Limitation of thi. th esi
The the i fac

me limitati n .

available fi r mo t

f th eco n mic indicator , th ere wa lack of tock ind ex pri ce in th

nin eti e -D r om countri

n

f which i th e una ailabi lity f data.

. For in tan e. m nthl y data wa una a il able .fl r Ru

lth ugh data are
arl y

ia'

until 1994 ince there wa no electro ni c tradin g y tern till that time. A a re ult, there are n
electronic data record

maintained up t

that y ar. Another limitation i

about ex treme

observations in the data et, re ulting in the probl em of ou tli er . Thi i co mmonly found in ca
of export growth data. However, uch outlier have been removed from th e amp le by applying
the extrem e tud entized deviate test. Due to the above limitation , ample ize i limit d in thi
the i . Finally, m

t

f ata erie except index retun1 ar a ai l bl e on a y arly ba i , which

have been conve rted to monthly data. However, avai labi lity of a tual m nthl
more informative.

61 I Page

data

ould b

5.3 R ecommendation for future re earch
Thi th i highlight and offer avenue :D r future re earch u ing panel data. The inclusion of
additional

ariabl

mea uring the 1 el

f financial market developm nt commodity price

country- pecific go

rnance, quality f g

mm nt and p litica l in titution

increa ing our und r tanding about the imp rtance of uch factor
emerging tock mark t .

dynamic

m the performance of

wid range of ample period h uld be con idered for future study .

n id Iing ther emerging market and de
th

a pos ibility for

1 ped countii

might be beneficial to under tand

of t ck mark t r lati n hip between the e market . This will al o give an

oppmtunity to con ider the di versified nature f crise ( uch a , political cri i , real e tate mark t
era h) in an economy while

timating mpirical m del . Thi will strengthen our understanding

ab ut tock market ' re pon e to individual type of Cii e in merging countrie .
Another important future re earch could be the inclusion of financial cri i variabl e that wdl
capture individual time- pecific effect

of financia l crise

interaction term between U .S. index return

of each BRI

economy . The

and time-specific variables will al o all ow u

und erstanding the importance of the U .S. tock market performance during the financial cri i of
individual BRICS economy. Furthermore, I uggest that panel method can be applied on other
geographically centered emerging market blocs such as ASEAN and Central and Eastern Europe
(CEE). Fmther research may also apply panel methods on stock market in Latin America and
emerging G-9 countrie in order to provide wider investigation into the interdependence with the
developed markets. Finally, empirical model

should c n ider th

po ibility

f cau ality

between BRICS and U.S. index returns for future research and e timation technique can furth r
be improved by using the

62 I Page

eneralized Method of Moments (GMM) .

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