The causal relationship between the macroeconomic variables and the stock price: the case of Brazil

Munjid, Modhaa and Masih, Mansur (2017): The causal relationship between the macroeconomic variables and the stock price: the case of Brazil.

Abstract

This study attempts to investigate the direction of causal relationship between the Brazilian stock market index (the Bovespa market index) and selected macro-economic indicators, namely interest rate, money supply (M2), and Brazilian Real exchange rate to the US dollar. A number of studies investigated the causal relationship between macro-economic indicators and stock market indices in the developed countries. But in the context of developing countries in South America such as Brazil, few studies can be traced in the literature. Thus, this study focuses on this issue by applying the standard time series techniques. The results of the study indicate that the variables under analysis are in fact cointegrated, which proves the existence of a long-term theoretical relationship among the variables. As regards the direction of causality, the results tend to indicate that the interest rate variable is the most exogenous (or leading) variable and the exchange rate is the most endogenous (or lagging) variable. These findings imply that the interest rate variable played a significant role in affecting the stock returns of the Bovespa Market Index and hence a special attention should be given to its management. Furthermore, strong evidence points to the relative exogeneity of the Bovespa Market Index, which means that the Brazilian stock returns can be used in predicting the endogenous macroeconomic indicators analyzed in this study.

• Item Type: MPRA Paper
• Language: English
• Keywords: stock returns, macroeconomic variables, Granger-causality, VECM, VDC
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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