Stock markets' return, macroeconomic variables and financial environment in bric economies

Abstract

Maximizing the return of investment in addition to minimizing the associated risk has always been a challenging issue for the stock market investors. The present study seeks to answer the questions such as how should be the market classification, how to compute the probability of crisis occurrence and how should be modelling of market return based on different viewpoints of market analyzers. To do so, macroeconomic and financial data of 4324 active companies in the stock markets of Brazil, Russia, India and China (BRIC) were analyzed. The data analysis was based on Panel Data and in terms of System Generalized Method of Moments (SGMM) covering the period of 2005–2012. In order to select the optimum market, the research adopted Markowitz's analysis. Moreover, in order to identify the most important variables affecting the firms’ return in BRIC, four general perspectives of stock market analysis called Technical, Fundamental, International and New-Fundamental viewpoints were employed. The lagged form of the dependent variable adopted based on the Technicalists perspective. From Fundamentalist’s viewpoint, macroeconomic variables affecting stock price or returns are included in the modelling. The probability of financial crisis occurrence computed by an Early Warning System (EWS) designed using Artificial Intelligence (AI) algorithms. The estimated probability of the financial crisis occurrence has been used as an explanatory variable in the modelling. From Internationalist’s viewpoint, international variables like global GDP, and from New- Fundamentalist’s perspective, institutional variables like macroeconomic stability index should be included in the modelling. Finally, the most important variables based on each point of view are aggregated into one model as the baseline model. Findings show that in a constant and equal level of risk, investing in BRIC stock markets gained a higher rate of return than investing in European and US groups of stock markets. In addition, the results of the baseline model indicated that the current firms’ returns index (as a dependent variable) has been positively affected by its lagged form, overall BRIC stock market return index, macroeconomic stability index, global GDP index and sentiment index. Whereas, the impact of interest rate, exchange rate and probability of the financial crisis occurrence, on the firms' return is negative. Furthermore, the results of the study provided evidence on employed policies that intensify the economic stability and make an attempt to remove factors that increase the probability of the financial crisis occurrence such as fiscal deficits, reduction of domestic credits and foreign debts.