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Stock Markets and Exchange Rate Behaviour of the BRICS

Afees Salisu (), Juncal Cuñado (), Kazeem Isah () and Rangan Gupta ()
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Kazeem Isah: Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria

No 202086, Working Papers from University of Pretoria, Department of Economics

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.

Keywords: Stock market; Exchange rate; Uncovered Equity Parity; Forecast evaluation (search for similar items in EconPapers)
JEL-codes: F31 G11 G15 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2020-09
New Economics Papers: this item is included in nep-cis, nep-fmk, nep-isf and nep-ore
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