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Stock Markets and Exchange Rate Behaviour of the BRICS

Author

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  • Afees A. Salisu

    (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria)

  • Juncal Cunado

    (Economics Department, University of Navarra, Spain)

  • Kazeem Isah

    (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)

Abstract

Relying on the Uncovered Equity Parity, we examine whether stock returns contain useful information that can be exploited to improve the forecast accuracy of exchange rate movements of the BRICS using a long range of data sample. Thus, we formulate a predictive model that links exchange rate movements to stock return differential between the domestic market and the foreign (US) market. We also test for any probable asymmetric relationship between the two variables while also accounting for the role of observed common (global) factor such as oil price. We find a positive relationship between stock return differential and exchange rate return for three of the BRICS countries namely Brazil, India and South Africa, thus validating the UEP hypothesis while a contrasting evidence is observed for China as well as Russia (after accounting for asymmetry effect). Our in-sample and out-of-sample forecasts validate the significance of the predictive content of stock returns for exchange rate movements of the BRICS while accounting for the role of observed common (global) factor and asymmetry may further improve the forecast accuracy. Our results have implications for portfolio diversification and foreign exchange management.

Suggested Citation

  • Afees A. Salisu & Juncal Cunado & Kazeem Isah & Rangan Gupta, 2020. "Stock Markets and Exchange Rate Behaviour of the BRICS," Working Papers 202086, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202086
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    2. Khyati Kathuria & Nand Kumar, 2022. "Pandemic‐induced fear and government policy response as a measure of uncertainty in the foreign exchange market: Evidence from (a)symmetric wild bootstrap likelihood ratio test," Pacific Economic Review, Wiley Blackwell, vol. 27(4), pages 361-379, October.
    3. Salisu, Afees A. & Gupta, Rangan & Kim, Won Joong, 2022. "Exchange rate predictability with nine alternative models for BRICS countries," Journal of Macroeconomics, Elsevier, vol. 71(C).
    4. Oleksandr Castello & Marina Resta, 2022. "Modeling the Yield Curve of BRICS Countries: Parametric vs. Machine Learning Techniques," Risks, MDPI, vol. 10(2), pages 1-18, February.
    5. Peter Arhenful & Richard Fosu & Mathew Owusu-Mensah, 2022. "Exchange Rate and Stock Price Nexus: Evidence from Ghana," Journal of Social and Development Sciences, AMH International, vol. 12(4), pages 9-15.
    6. Thobekile Qabhobho & Anokye M. Adam & Emmanuel Asafo-Adjei, 2023. "Do Local and International Shocks Matter in the Interconnectedness amid Exchange Rates and Energy Commodities? Insights into BRICS Economies," International Journal of Energy Economics and Policy, Econjournals, vol. 13(6), pages 666-678, November.

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    More about this item

    Keywords

    Stock market; Exchange rate; Uncovered Equity Parity; Forecast evaluation;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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