Estimating the relationship between BRICS and U.S. stock index returns using panel regression methods

This thesis examines the relationships between BRICS (Brazil, Russia, India, China and South Africa) stock index returns and U.S. stock index returns using a panel data covering the period from 1990 to 2013. This relationship is further examined in relation to both the global financial crisis in 2007-2009 and BRICS' own financial crises in 1997-1999. To control for the effects of economic factors on stock markets, three macroeconomic variables including GDP growth rate, nominal interest rate, and exchange rate are included in empirical models. The panel regression methods are used in this thesis. Results reveal that index returns in BRICS stock markets are significantly responsive to the U.S. stock market performance. However, the findings show that the BRICS stock markets did not underperform during the global financial crisis. Instead, BRICS index returns increased during that time. The results also exhibit that while financial crises originated in the BRICS economies adversely affected index returns of respective stock markets in those countries, this negative impact can be reduced by choosing U.S. stocks subject to the U.S. stock market performing well during the same time. Hence, a portfolio consisting of stocks from both BRICS and U.S. markets could be beneficial for reducing the risk of financial crisis. The thesis concludes with policy recommendation suggesting that a close monitoring of U.S. financial market is critical for BRICS investors who prefer to invest in U.S. stocks. Also, there is a need for international fund managers who invest in newly emerging stock markets to evaluate the value and stability of domestic currencies as part of their stock market investment decisions. --Leaf ii.