Causality and Dynamic Relationships between Exchange Rate and Stock Market Indices in BRICS Countries: Panel/GMM and ARDL Analyses

Abstract

This paper examines the causality and the dynamic links between exchange rates and stock market indices in Brazil, Russia, India, China, and South-Africa (BRICS). Daily closing prices from January 2008 to February 2018 are used for the analysis. By applying the dynamic panel Generalized Method of Moments (GMM) model and the ARDL method, results show that exchange rate changes have a significant effect on past and current volatility of the BRICS stock indices. Besides, ARDL estimations reveal that exchange rate movements have a significant effect on short- and long-term stocks market indices of all BRICS countries. Our findings have implications for international investors who manage risks in their portfolios as well as for policymakers who are responsible for financial and macroeconomic stability.