Asia-Pacific Financial Markets (2023) 30:259–272

https://doi.org/10.1007/s10690-023-09399-7

ORIGINAL RESEARCH

Macroeconomic Response to BRICS Countries Stock

Markets Using Panel VAR

Babita Panda1 · Ajaya Kumar Panda2 · Pradiptarathi Panda3

Accepted: 18 February 2023 / Published online: 9 March 2023

© The Author(s), under exclusive licence to Springer Japan KK, part of Springer Nature 2023

Abstract
This study measures the relationships between macroeconomic variables and stock
returns for BRICS countries. The study uses monthly data of select macroeconomic
variables collected from February 1997 to December 2019. In addition to the tradi-
tional macroeconomic variables, the study used the new age macroeconomic vari-
ables like- economic policy uncertainty index, Crude oil volatility index, Global
financial stress index, and SENTIX global index. Using Panel VAR and Granger
causality, the study finds that market returns positively influence exchange rates. In
contrast, the market tends to react negatively to changes in consumer price infla-
tion and foreign portfolio investment. However, the equity market is susceptible to
the economic growth (IIP) of BRICS economies. These macroeconomic indicators
exhibit significant influence on the stock markets.

Keywords Macroeconomic variables · BRICS stock market · Panel VAR

JEL Classification E60 · G11 · G15

* Babita Panda
net2bobby@gmail.com
Ajaya Kumar Panda
akpanda@nitie.ac.in
Pradiptarathi Panda
pradipta.mfc@gmail.com
1
Pillai HOC College of Arts, Science and Commerce, Rasayani, Raigad, Maharashtra 410222,
India
2
National Institute of Industrial Engineering (NITIE), Powai, Mumbai, Maharashtra 400087,
India
3
National Institute of Securities Markets (NISM), SEBI Road, Patalganga, Rasayani, Raigad,
Maharashtra 410222, India

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260 B. Panda et al.

1 Introduction

The process of globalisation has brought the world together. As a result, the
response of emerging markets to macroeconomic changes has fascinated global
investors. It is because the world has become more integrated than ever. These
responses have often created opportunities for portfolio diversification by global
investors. Financial openness due to globalisation has opened the financial mar-
kets to international investors and increased the risk of contagion. As a result,
the world economy has experienced market collapses and economic turmoil due
to spillover of financial crises from one market to other. However, spillover of
macroeconomic contagion has been observed over a time lag and with varying
degrees of intensity.
Nonetheless, globalisation has increased financial integration, resulting in
a higher correlation between emerging and global markets (Aloui et al., 2011;
Panda et al., 2021). This integration caused diversification of the international
portfolio and hedging of potential risk by global investors. Besides, movement in
many other macroeconomic variables also impacts the variation in stock prices.
Further, economic policy uncertainty index negatively impacts stock markets
(Brogaard & Detzel, 2015). Earlier studies find several macroeconomic factors
impacting stock market movements. Some indicators are related to real economic
activity, such as gross domestic product (GDP) or gross national product (GNP).
Since GDP or GNP data are available only quarterly or annually, literature consid-
ered the index of industrial production (IIP) as a proxy for GDP or real economic
activity in many cases. An expansionary economic activity may be observed with
an increase in IIP via increased investment and robust corporate earnings. Higher
growth, investment and earnings create positive sentiments leading to an appre-
ciation of stock prices. Studies have reported a positive relationship between IIP
and stock price (Chen et al., 1986; Maysami et al., 2004; Rahman et al., 2009;
Ratanapakorn & Sharma, 2007). Secondly, an increase in inflationary tendency is
a natural phenomenon of a growing economy.
Moreover, inflation is another crucial macroeconomic variable that affects the
stock price. Studies find a negative relationship between inflation and stock price
(Chen et al., 1986; Fama, 1981; Mukherjee & Naka, 1995; Pal & Mittal, 2011).
However, contrary to these studies, Ratanapakorn and Sharma (2007) find a posi-
tive relationship between inflation and stock price. Fluctuations in stock prices
are considered responses of the markets to external forces. Unexpected events
influence individual asset prices, and some affect the stock market more (Chen
et al., 1986).
There is a plethora of research on the impact of macroeconomic variables on
stock prices. Earlier studies find the existence of positive, negative, and in some
cases, no relationship between the traditional macroeconomic variables and stock
price. However, studies based on the group of countries are fewer to the best of
our knowledge, especially for developing and emerging markets like BRICS coun-
tries. Further, studies relating to the impact of new age macro-economic variables
on the stock markets are fewer to the best of our knowledge. In this context, the

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Macroeconomic Response to BRICS Countries Stock Markets Using… 261

current study attempts to study the impact of macroeconomic variables and stock
prices on BRICS countries. All five economies of BRICS are considered a single
unit; hence, the study attempts to analyse a system approach using panel data
models. Diversification in these BRICS countries gives economic value (Panda &
Thiripalraju, 2020). The external macroeconomic variables spillovers are lower
than the internal macroeconomic variables spillovers to the BRICS countries’
stock markets (Patra & Panda, 2021). Again, the unconventional monetary policy
of the USA and Europe spillovers to the BRICS countries’ stock markets (Lubys
& Panda, 2021). South Africa is the best country to invest in among the BRICS
countries, depending on the risk-reward ratio, followed by Russia, India, Brazil,
China, and South Africa. Based on overnight returns, India’s risk-reward ratio is
higher, followed by Brazil, Russia, and South Africa (Bhuyan et al., 2016). Again,
many of the studies have ignored the impact of new-age macroeconomic vari-
ables (like the economic policy uncertainty index (EPUI), global economic policy
uncertainty index (GEPUI), Crude oil volatility index (CRUDEOIL3M), Global
financial stress index (GFSI) and SENTIX global index (SENTIX)) to stock mar-
kets. This motivates the present study to consider the new age and traditional
macroeconomic indicators to analyse their relative impact on the BRICS stock
markets. This study divides macroeconomic variables into two categories (inter-
nal and external) to examine their impact on stock markets for BRICS countries.
The study aims to find key systemic indicators that influence the market move-
ments of BRICS using panel data analysis. At the same time, the study also attempts
to undertake a series of pre-estimation and post-estimation analyses to ensure robust
estimates of the analysis. The BRICS countries are contributing 26% to the world-
listed companies, 16% to world market capitalisation, 22% to world GDP, and 42%
to the world population. Secondly, these countries are emerging countries attracting
foreign investments, and the domestic market capitalisation keeps increasing yearly.
This motivates the present research to explore the key systemic indicators influenc-
ing its equity market. The present study contributes to the literature in many ways.
Unlike previous studies, the present study assumes all five economies of BRICS as
one unit (i.e., a single economy unit). It attempts to measure the response of BRICS
equity market returns due to macroeconomic shocks specific to BRICS countries
and international macroeconomic shocks external to this economy. The study’s
empirical findings have significant implications for international investors for their
portfolio diversification and managing international asset management as well as the
policymakers to identify critical systemic factors of the BRIC economy.
Section 2 of this study discusses the literature review; Sect. 3 discusses the nature
and sources of data; Sect. 4 highlights methodology, and Sect. 5 presents the study’s
empirical findings. Lastly, Sect. 6 concludes the study.

2 Literature Review

In this section, the study reviews literature reporting the relationship between mac-
roeconomic variables and stock markets. The existing literature on the impact of
macroeconomic variables and stock prices tries to measure the response from real

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economic activities, news impact, foreign exchange and interest rate markets, and so
on. For instance, news related directly to real activity substantially impacts cyclical
stocks more than noncyclical ones. International news impacts more than domestic
news on the USA and German stock markets. Considering GDP growth, business
confidence measures, and the development of the real sector of the United States
and Germany, the study finds news on interest rates, inflation, and the IFO business
climate index contribute most to market movements (Funke & Matsuda, 2002). Cau-
sality exists between India’s stock market and real economic variables (Sahu & Dhi-
man, 2011). Gold is considered a hedge against stock market volatility. For instance,
oil and gold prices negatively impact the stock market, and the money supply posi-
tively influences the Indian stock price (Ray, 2012).
Further, UK common stocks offer a hedge against inflation and depend on dif-
ferent inflationary regimes (Narayana & Zheng, 2012). Again, gold and silver can
form a reasonably good hedge against stocks (Sireesha, 2013). Sometimes, research-
ers assess the impact of the foreign exchange market, inflation, and gold on the stock
market. For example, inflation and foreign exchange reserves are not impacting the
stock price. However, exchange rates and gold prices affect stock prices (Sharma &
Mahendru, 2010). During the global financial crisis period, the existence of asym-
metric volatility spillovers between stock markets and foreign exchange markets is
more (Panda & Deo, 2014a; and 2014b).
The impact of economic forces like the spread between long and short inter-
est rates, expected and unexpected inflation, industrial production, and the spread
between high and low-grade bonds are priced in the stock market return of equally
weighted as well as value-weighted NYSE index (Chen et al., 1986). Further, the
Index of Industrial Production (IIP), net foreign institutional investment (FII), and
exchange rate impacted the Indian stock market during the subprime financial cri-
sis. Again, the IIP and exchange rate can predict the stock market better than FII
(Mohapatra & Panda, 2012). The long-run relationship exists between the macro-
economic variables and stock markets. For example, IIP, CPI, M1, and Mumbai
interbank money market rates have long-run relationships with Indian stock markets.
Further, the IIP impacts positively and inflation negatively on Indian stock mar-
kets (Naka et al., 1998). Similarly, studies find that macroeconomic variables help
predict the stock markets of several European countries. Further, IIP, inflation, and
M1 impact the USA, UK, Germany, Italy, Belgium, France, Netherlands, and Swit-
zerland stock markets (Errunza & Hogan, 1998). Studies find that the short-run and
long-run relationship exists between the macroeconomic variables (output, inflation,
and interest rates) and stock and bond markets (Dickinson, 2000). Interestingly mac-
roeconomic variables impact the USA stock market positively and negatively in the
long run. For example, industrial production, inflation, money supply, short-term
interest rate, and exchange rate positively impacts the stock price, and the long-term
interest rate is negatively related to the stock price of the USA (Ratanapakorn &
Sharma, 2007).
The exchange rate, inflation, money supply, IIP, long-term government bond rate,
and call money rate impacts the stock price of Japan in the long run (Mukherjee
& Naka, 1995). Further, narrow money supply, broad money supply, and foreign
exchange reserves have a long-run relationship with Singapore stock markets, and

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the exchange rate does not impact this stock market (Mookerjee & Yu, 1997). Asian
countries realise the mixed results on the impact of macroeconomic variables on
stock markets. For example, growth in output impacts positively and aggregate
price level impacts negatively on the stock markets of the Philippines, Indone-
sia, Singapore, Malaysia, and Thailand. In addition, a negative relationship exists
between stock price and interest rate for the Philippines, Singapore, and Thailand
but a positive relationship in the case of Indonesia and Malaysia (Wongbampo &
Sharma, 2002). The money supply, GDP, and interest rates explain New Zealand
stock markets (Gan et al., 2006). Again, long-run relationships exist between infla-
tion, exchange rate, and the stock markets.
Further interest rates and gross domestic savings do not play a significant role in
determining the stock price of India (Pal & Mittal, 2011). Interestingly fiscal deficit
and foreign investment are not impacting the Indian stock market. However, interest
rate, IIP, money supply, inflation, and exchange rate impact the Indian stock market
(Ray & Vani, 2003). The IIP, money supply, and FDI impacts stock prices for India
in the long run (Ahmed, 2008). Similarly, a long-run relationship exists between
macroeconomic variables and the Indian stock market. Again, a positive relationship
exists between money supply and IIP; simultaneously, a negative relationship exists
from inflation in the Indian stock market (Naik & Padhi, 2012).
Mixed results on the impact of macroeconomic variables on stock markets real-
ised for Argentina, Brazil, Chile, and Mexico. For example, IIP positively impacts
stock markets, and interest rate and exchange rate negatively impact stock markets
in Brazil. Further, exchange rate impacts negatively; and IIP, money supply, and
interest rates impacts are insignificant. Interest rate and money supply negatively
determine Argentina’s stock return, and the influence of IIP and exchange rate are
insignificant for this market. IIP positively impacts Chile’s stock market, and the
exchange rate and money supply do not impact these markets (Abugri, 2008).
Similarly, interest rates, foreign exchange reserves, industrial production, money
supply and exchange rate negatively impact the Malaysian stock market (Rah-
man et al., 2009). Further, inflation and stock returns are bidirectionally causing
each other (Bhattacharya & Mukherjee, 2006). Again, macroeconomic volatility is
not significantly impacting the stock market (Garcia & Liu, 1999). Crude oil and
exchange rate for BRIC countries’ stock markets are unrelated (Gay, 2008). There is
no causality between interest rate and IIP on the stock price. Further, unidirectional
causality exists from inflation, FDI, GDP, exchange rate, and fixed capital forma-
tion on the stock price. Moreover, bidirectional casualty exists from crude oil price,
money supply, foreign exchange reserve, and WPI to stock price exists for India
(Ray, 2012).

3 Nature and Data Sources

This study considers monthly internal and external macroeconomic variables and
stock indices for each of the BRICS countries. For internal macroeconomic vari-
ables, the study considers the IBOVESPA index, the exchange rate (Real), Inflation
(CPI), the Index of Industrial Production (IIP), and Net Foreign Portfolio Investment

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(FPI) for Brazil. Similarly, for Russia, we have used the MICEX index, the exchange
rate (Rubble), Inflation (CPI), the Index of Industrial Production (IIP), and Net FPI.
The macroeconomic indicators for India are the NIFTY index, the exchange rate
(Rupee), Inflation (CPI), the Index of Industrial Production (IIP), and Net FPI. For
China, we have considered the Shanghai Composite Index (SHCOMP), the exchange
rate (Yuan), Inflation (CPI), the Index of Industrial Production (IIP), and Net FPI.
Finally, for South Africa, we have used JSE all shares index (JALSH), the exchange
rate (Rand/ZAR), Inflation (CPI), the Index of Industrial Production (IIP), and Net
Portfolio Investment (NPI). Broadly, the country benchmark market index, exchange
rate, inflation rate, economic growth proxied as the index of industrial production
and net foreign portfolio investments are considered internal country-specific macro
indicators. Similarly, as external macroeconomic variables, we have considered the
S& P 500 index (SPX), three months crude oil volatility (CO), Global Economic
policy uncertainty index (GEPUI), SENTIX Global index (SENTIX), Global Finan-
cial Stress Index (GFSI) and Fed Rate (FEDRATE). All data are sourced from
Bloomberg, Thomson Reuters, and The Institute of International Finance. The
study period is from February 1997 to December 2019, and the frequency of data is
monthly. The choice of the study period was based on the maximum availability of
the data for each country, and the data period is limited till 2019 as the study does
not wish to include the COVID period and the current data period.

4 Methodology

The current study uses dynamic panel data models to measure the dynamic sensitiv-
ity of stock market indices of BRICS countries due to internal and external macro-
economic shocks. Since the panel vector autoregression model assumes all the vari-
ables should be endogenous to the system of models, the dynamic response of the
BRICS stock market indices is estimated through the regression approach of mac-
roeconomic parameters of the whole system. These macroeconomic variables are
used as lagged endogenous variables in the system of equations. The estimates of
the panel vector auto-regression model (panel VAR) are discussed as follows,
J
∑ J
∑ J
∑ J
∑ J
∑
SIit = ∝11j SIit - j + ∝12j EXit - j + ∝13j CPIit - j + ∝14j IIPit - j + ∝15j FPIit - j + ε1it
j=1 j=1 j=1 j=1 j=1
(1)
J J J J
∑ ∑ ∑ ∑
SIit = ∝11j SIit - j + ∝12j SPXit - j + ∝13j COit - j + ∝14j GEPit - j
j=1 j=1 j=1 j=1
J J J
∑ ∑ ∑
+ ∝15j STit - j + ∝16j GFit - j + ∝17j FRit - j + 𝜀1it
j=1 j=1 j=1
(2)
where “SI” implies a country-specific stock index, “Ex” represents the exchange
rate, “CPI” represents the consumer price index, “IIP” implies the index for indus-
trial production, and “FPI” represents the net foreign portfolio investment for the

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Macroeconomic Response to BRICS Countries Stock Markets Using… 265

respective countries. Similarly, "SPX” implies the S&P 500 index of the USA, “CO”
measures three months crude oil volatility index, “GEP" presents the Global Eco-
nomic policy uncertainty index, “ST" presents the Sentix global index, “GF” repre-
sents the Global Financial Stress Index and finally “FR” represents Fed rate. Model
1.1 and 1.2 present reduced form panel VAR model of internal and external macro-
economic variables impacting stock price, respectively. After estimating the reduced
form VAR model (i.e., Eqs. 1 and 2), the estimated errors will be modelled in mov-
ing average (MA) to capture the impact of endogenous variables. These lagged
endogenous variables depend on their estimated lagged residuals of the reduced
form VAR model.
As a system of equations, the VAR model estimates equations equal to the num-
ber of variables of the model. In the above equation, the subscript J implies the opti-
mum lag length of the variables based on Akaike Information Criterion (AIC). The
error terms of the reduced form VAR model have been used to analyse the impulse
response of the structural equations of the present study. Sims (1980) states that the
reduced form VAR model is purely a forecast model. The estimated error of the
reduced form VAR model is presented as a moving average (MA) term that captures
how the endogenous variables depend on their lagged residuals of the reduced form
VAR model (see 3 and 4). The moving average presentation of the estimated errors
of the endogenous variables is presented below.
∞ ∞ ∞ ∞ ∞
∑ ∑ ∑ ∑ ∑
SIit = 𝛼10 + b11j 𝜀1it−j + b12j ∈2it−j + b13j ∈3it−j + b14j 𝜀4it−j + b15j 𝜀5it−j + 𝜇1it
j=1 j=1 j=1 j=1 j=1
(3)
∞ ∞ ∞ ∞
∑ ∑ ∑ ∑
SIit = 𝛼10 + b11j 𝜀1it−j + b12j ∈2it−j + b13j ∈3it−j + b14j 𝜀4it−j
j=1 j=1 j=1 j=1
∞ ∞ ∞ (4)
∑ ∑ ∑
+ b15j 𝜀5it−j + b16j 𝜀6it−j + b17j 𝜀7it−j + +𝜇1it
j=1 j=1 j=1

These residuals anticipated correlating, and the estimated coefficients of Eqs. 3

and 4 must be appropriately interpreted. This is because of endogeneity. To coun-
ter endogeneity, the residuals must be orthogonalised by multiplying the Cholesky
decomposition of the covariance matrix of the residuals. These orthogonalised
residuals are measured as random shocks. The moving average representation of the
orthogonalised random residuals is called impulse response functions (IRF). It cap-
tures the response of each variable included in the model out of one Cholesky stand-
ard deviation shock received from each variable of the system. The orthogonalisa-
tion of Eqs. 3 and 4 are presented below in Eqs. 5 and 6.
∞ ∞ ∞ ∞ ∞
∑ ∑ ∑ ∑ ∑
SIit = A10 + B11j e1it−j + B12j e2it−j + B13j e3it−j + B14j e4it−j + B15j e5it−j + 𝜗1it
j=1 j=1 j=1 j=1 j=1
(5)

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266 B. Panda et al.

∞ ∞ ∞ ∞
∑ ∑ ∑ ∑
SIit =A10 + B11j e1it−j + B12j e2it−j + B13j e3it−j + B14j e4it−j
j=1 j=1 j=1 j=1
∞ ∞ ∞ (6)
∑ ∑ ∑
+ B15j e5it−j + B16j e6it−j + B17j e7it−j + +𝜗1it
j=1 j=1 j=1

5 Empirical Analysis

5.1 Pre‑estimation Test

Before estimating the response of stock price due to one standard deviation shock
(SD) to a system of internal and external macroeconomic shocks using panel
impulse response functions (IRF), we first check the stability condition of the esti-
mated panel VAR. The estimated statistics and the eigenvalues measure the overall
stability of the panel VAR model are presented in Tables 1 and 2. Since the esti-
mated eigenvalues remain within the unit circle, it confirms stable estimates of panel
VAR to ensure its robustness (see Tables 1 and 2). We have used the stability test
as a pre-estimation diagnostic test for Panel VAR models measuring the impact of
internal and external macroeconomic shocks on the stock returns of BRIC countries.

5.2 Analysing Response of the Equity Market Due to Shocks in Macroeconomic

Indicators

The response to Cholesky One SD innovations to stock price with ± 2.5 SE, i.e.,
95% confidence interval, is presented in Figs. 1 and 2 for internal and external mac-
roeconomic variables, respectively. The impulse response function of Eqs. 3 and 4

Table 1  Stability Test of Panel VAR model measuring impact of internal macroeconomic shocks on
stock returns of BRIC countries
Eigen values Absolute Eigen values

0.970 0.970

0.601 0.601
0.159 0.159
0.058 0.058
-0.0093 0.0093

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Macroeconomic Response to BRICS Countries Stock Markets Using… 267

Table 2  Stability Test of Panel VAR model measuring impact of external macroeconomic shocks on
stock returns of BRIC countries
Eigen values Absolute Eigen values

0.977 0.977

0.901 0.901
-0.258 − 0.258
-0.119 − 0.119
0.172 0.172
0.066 0.066

Response of Stock index due to 1 S.D shock in Response of Stock index due to 1 S.D shock in
Exchange Rate Consumer Price Index (CPI)

Response of Stock index due to 1 S.D shock in Response of Stock index due to 1 S.D shock in Net
Index of Industrial Production (IIP) Foreign Portfolio (FPINET)

Fig. 1  Graphs analysing impact of internal macroeconomic variable on stock market return of BRICS
countries as a system

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268 B. Panda et al.

Response of Stock index due to 1 S.D shock in S & P Response of Stock index due to 1 S.D shock in
500 index (SPX) Crude Oil Price

Response of Stock index due to 1 S.D shock in Response of Stock index due to 1 S.D shock in
Global Economic Policy (GEPUI) SENTIX global Index (SENTIX)

Response of Stock index due to 1 S.D shock in Response of Stock index due to 1 S.D shock in
Global Financial Stress Index (GFSI) FED Rate (FEDRATE)

Fig. 2  Graphs analysing impact of external macroeconomic variable on stock market return of BRICS
countries as a system

is estimated from Eqs. 1 and 2. Figure 1 shows that the stock price responds posi-
tively due to one SD shock to the exchange rate, which takes almost four periods to
neutralise. In the case of CPI and FPINET, the immediate response of stock indices
is negative, but it starts correcting positively, and its impacts neutralise quickly. The
shock of inflation and net foreign portfolio to market returns gets normalised after
one period.

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Macroeconomic Response to BRICS Countries Stock Markets Using… 269

On the contrary, the stock markets of BRICS are relatively more volatile due to
shocks in the overall economy represented by the index of industrial production.
Stock indices oscillate, and the impact of IIP shock can be realised 5–6 periods
ahead of index returns of BRICS countries. Among the internal macroeconomic
factors, shocks of exchange rate and FPINET remains active for 1–2 periods and
are then neutralised. However, the stock market remains sensitive to inflation and
economic growth. The wider confidence interval of CPI and IIP is clear evidence
that even the shocks look dying out, but the market remains sensitive due to high
estimated standard error.
Similarly, for external macroeconomic variables, stock markets respond posi-
tively due to shocks in SPX, GFSI, and Fed rate, and the market dilutes the shocks
within 2 to 3 periods. Relatively, the response is substantially high due to shock in
SPX and Fed Rate. However, stock markets experience volatility and oscillate up to
2–3 periods due to shocks in (CO) crude oil price, GEPUI, and SENTIX. Interest-
ingly, we have noticed that the stock market response due to shocks to SPX, CO,
GEPUI, and SENTIX neutralised after 4–5 periods ahead. However, markets remain
sensitive respective to GFSI and Fed Rates. Even though the market response dies
out within two periods, markets remain sensitive over a long period, evidenced by
the high standard error. Moreover, the market remains sensitive to domestic inflation
and economic performance among the internal macroeconomic factors and concern-
ing GFSI and Fed Rate among external macroeconomic factors.

5.3 Panel Granger Causality

Although estimates of the panel vector auto-regression model may explain the mul-
tivariate relationships among the system of equations, the panel Granger causality
Wald tests capture Granger non-causality by expressing each random variable as a
function of its lag values and lag values of other variables in the system. Hence the
present study estimates Granger causality Wald tests as a post-estimation test to cap-
ture the multivariate Granger causality among the system of variables that’s stock
market returns of the BRICS countries.

5.4 Analysis of Panel Granger Causality

The results for our model, where internal and external macroeconomic variables are
independent variables and stock markets are the dependent variables, are presented
in Table 3. The Granger causality estimates for the null hypothesis that macroeco-
nomic variable (both from internal and external categories) does not cause stock
index are shown in the second and third column of Table 3. Among internal mac-
roeconomic variables, the null hypothesis of an excluded variable does not Granger
cause the stock market is rejected at the 5% and 10% significance in the case of the
exchange rate, FPINET, and for all variables together. However, among four internal
macroeconomic variables, there is not enough evidence against the null hypothesis
in the case of CPI and IIP. Similarly, in the case of 6 external macroeconomic vari-
ables, the null hypothesis is rejected for SPX, GFSI, and Fed Rate, implying a flow

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270 B. Panda et al.

Table 3  Panel Granger-causality Internal macroeconomic indica- External macroeconomic indica-

Wald tests tors tors
Excluded variable Chi2 Excluded variable Chi2

Exchange rate 3.762** SPX 86.31***

CPI 0.141 CRUDE OIL 0.185
IIP 0.009 GEPUI 1.197
FPINET 3.537** SENTIX 0.014
ALL 4.576*** GFSI 5.38***
FEDRATE 16.21***
ALL 18.93***

H0: Excluded variable does not Granger-cause Stock Index

of significant causality to the stock market. The rest of the variables, like Crude Oil,
GEPUI, and SENTIX, exhibit strong causality alone to the stock market. However,
these macroeconomic indicators significantly influence the stock market as a group
of variables.

6 Conclusion

This study examines the dynamic responses of equity returns of BRICS economies
due to shocks in internal and international macroeconomic variables. Unlike other
studies (Aloui et al., 2011; Bhuyan et al., 2016; Brogaard & Detzel, 2015; Pal & Mit-
tal, 2011; Panda & Thiripalraju, 2020; Patra & Panda, 2021; Rahman et al., 2009),
the present study assumes all five economies of BRICS as one economic unit and
attempts to measure the response of BRICS equity market returns due to country-
specific shocks specific to BRICS countries as well as international macroeconomic
shocks which are external to these economies. This makes the study unique of its
kind. The study finds that market returns are positively related to exchange rates and
respond positively due to news shocks to the exchange rates of these economies.
Similarly, markets tend to react negatively to consumer price inflation and changes
in foreign portfolio investment, but the impact remains for a short period. However,
the equity market is very sensitive to economic growth, as represented by the IIP of
BRICS economics. Except for economic growth, the shocks of the rest of the sys-
tem’s variables to the equity market remain for a relatively shorter period. However,
a wider confidence interval of these variables gives us a clue that the market will
remain sensitive to these indicators, and a small shock to these variables makes the
market reactive irrespective of its intensity. Moreover, as a group of variables, these
macroeconomic indicators impact stock markets significantly.
The study’s empirical findings have significant implications for international
investors regarding their portfolio diversification and managing international asset
management. Market participants can identify the critical macroeconomic indica-
tors internal and external to the system as systematic risk factors while risk profiling

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Macroeconomic Response to BRICS Countries Stock Markets Using… 271

their portfolio. This has significant implications for constructing and optimising a
portfolio regarding the BRICS economy. Policymakers such as central banks may
also use the study’s findings for market regulation.
The paper has an exciting feature for future research to study the transmission
of systemic risk shocks to equity markets and their volatility. It can also be an early
warning indicator to measure crisis and its contagion effects. We can also study the
impact of macroeconomic news shocks on derivatives markets and their price dis-
covery mechanism.

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