THEORETICAL MODEL EVALUATION OF STOCK PRICE AND EXCHANGE RATE RELATIONSHIPS IN BRICS COUNTRIES

Makmur  Sianipar; Yohanes  Indrayono; Hendro  Sasongko

doi:10.53067/ijomral.v4i4.354

Authors

Makmur Sianipar Universitas Pakuan Bogor
Yohanes Indrayono Universitas Pakuan Bogor, Indonesia
Hendro Sasongko Universitas Pakuan Bogor, Indonesia

DOI:

https://doi.org/10.53067/ijomral.v4i4.354

Keywords:

Granger causality, stock-exchange relationship, BRICS integration, financial interconnectedness, theoretical financial models

Abstract

This study investigates the theoretical and empirical relationships between stock prices and exchange rates within the BRICS countries (Brazil, Russia, India, China, South Africa, and Indonesia), particularly focusing on Indonesia following its official inclusion in BRICS on January 6, 2025. Using a daily time series dataset from June 2023 to May 2025, this research applies the Granger Causality Test to evaluate the direction of causality between capital and foreign exchange markets. The study is grounded in four major theoretical frameworks: flow-oriented, stock-oriented, portfolio balance, and asset market models.

The analysis reveals a heterogeneous structure of interdependence across BRICS countries, encompassing both unidirectional and bidirectional causalities. Notably, Indonesia’s capital market (JSX) demonstrates predictive influence over the domestic exchange rate (IDR), supporting the stock-oriented hypothesis. Moreover, the South African Rand (ZAR) exhibits dominant influence across multiple BRICS markets, while China’s Yuan (CNY) significantly affects the South African stock index, confirming China’s pivotal economic role. The study also identifies feedback loops between several country pairs, indicating strong financial integration and information transmission. This research contributes to the literature by incorporating daily data analysis and exploring the impact of Indonesia’s BRICS membership, an area previously underexplored. It offers theoretical enrichment by mapping empirical findings onto established models and provides policy insights for enhancing macro-financial coordination and volatility risk management among BRICS nations.

Downloads

Download data is not yet available.

References

Aggarwal, R. (1981). Exchange rates and stock prices: A study of the US capital markets under floating exchange rates. Akron Business and Economic Review https://www.researchgate.net/publication/284201636

Alagidede, P., Panagiotidis, T., and Zang,X. (2010). Causal Relationship between Stock Prices and Exchange Rates. Stirling Economics Discussion Paper. online at http://www.economics.stir.ac.uk

Ali, M., and Sun, G. (2017) . Dynamic Relations between Stock Price and Exchange Rate: Evidence from South Asia. International Journal of Economics and Financial Issues, 2017, 7(3), 331-341.

Allimuthu, S. (2023). A study on the interrelationship between the stock markets and the foreign exchange market in India. International Journal of Innovative Research in Engineering and Management, 10(5),83-87, https://doi.org/10.55524/ijirem.2023.10.5.14

Bahmani-Oskooee, M., & Saha, S. (2016). Do exchange rate changes have symmetric or asymmetric effects on stock prices? Global Finance Journal, 31, 57-72.

Bal, G.R., and Manglani, A..(2016). Cross market volatility spillover between stock market and foreign exchange: Evidence from Indian market. The Indian Journal of Commerce, 69 (3), 32-36

Chkili, W., & Nguyen, D. K. (2014). Exchange Rate movements and stock market returns in a regimeswitching environment: evidence for Brics countries. Research in International Business and Finance, 31, 4656, https://doi.org/10.1016/j.ribaf.2013.11.007.

Christensen, B.V. (2010). China in Africa. A macroeconomic perspective. Center for Global Development Working Paper 230. Electronic copy available at: https://ssrn.com/abstract=1824443

Dahir, M. A., Mahat, F., Razak, A. H. N., & Bany-Ariffin A. N. (2018). Revisiting the dynamic releationship between exchange rates and stock prices in Brics countries: a wavelet analysis. Borsa Istanbul Review, 18(2), 101-113, https://doi.org/10.1016/j.bir.2017.10.001

Diebold, F. X., & Yilmaz, K. (2015). Financial and macroeconomic connectedness: A network approach to measurement and monitoring. Oxford University Press : New York

Dornbusch, R., & Fischer S. (1980). Exchange rates and the current account. The American Economic Review, 70(5), 960-971, http://www.mit.edu/~14.54/handouts/dornbusch80.pdf.

Erdogan, S., Gedikli, A., and Cevik, E.I. (2020). Volatility spillover effect between Islamic stock market and exchange rate: Evidence from three emerging countries. Borsa istambul Review, 20(4), 322-333

Frenkel, J. (1976). A monetary approach to the exchange rate: Doctrinal aspects and empirical evidence. Scandinavian Journal of Economics, 78(2): 200–224

Gavin, M. (1989). The stock market and exchange rate dynamics. Journal of International Money and Finance, 8(2), 181–200. https://doi.org/10.1016/0261-5606(89)90022-3

Gavin, M. (1989). The stock market and exchange rate dynamics. Journal of International Money and Finance, 8(2), 181–200

Guo, B. and Ibhagui, O. (2019) China–Africa stock market linkages and the global financial crisis. Journal of Asset Management https://doi.org/10.1057/s41260-019-00122-8

Kilic, A., Kula, V., and Ozdemir, L. (2023). The Relationship between exchange rate volatility and stock index return: evidence from Turkey. Prizen Social Science Jorunal, 7(1), 1-14

Kumar, S, (2019). Asymmetric impact of oil prices on exchange rate and stock prices. The Quarterly Review of Economics and Finance, 72, 41-51, https://doi.org/10.1016/j.qref.2018.12.009.69

Laghari, F., and Chengang, Y. (2017). Are stock markets and foreign exchange markets cointegrated? An empirical analysis. International Journal of Managerial Studies and Research (IJMSR), 5(2), 1-10. http://dx.doi.org/10.20431/2349-0349.0512001

Mitra, R.. (2017_. Stock market and foreign exchange market integration in South Africa. World Dev. Perspect. 6, 32–34.

Nawab, N., Ahmad, S., and Khan, M.T. (2021). Causal relationship between inflation rate, exchange rate, interest rate and stock market returns. University of Wah Journal of Management Sciences, 5(1), 58-68

Nguyen, V.H.. (2019). Dynamics between exchange rate and stock price: Evidence from developed and emerging maket. The International Journal of Business and Finance Research Vol. 13, No. 1, 2019, pp. 73-84

Nyopa, T. & Khumalo, S.A.. (2022). Volatility spillovers in equity and foreign exchange markets: Evidence from emerging economies. Journal of Economic and Financial Sciences 15(1), a713. https://doi.org/10.4102/jef.v15i1.713.

Rubianto, R., Santoso, M.A., Atahau, A.D.R., and Harijono,H. (2019). The Indonesia Stock Exchange and its dynamics: An analysis of the effect of macroeconomic variables. Montenegrin Journal of Economics, 15(4), 59-73

Sensoy, A., Sobaci, C., Sensoy, S., and Alali, F. (2014). Effective transfer entropy approach to information flow between exchange rates and stock markets. Chaos, Solitons & Fractals 68, 180-185. http://dx.doi.org/10.1016/j.chaos.2014.08.007

Sikhosana, A., and Aye, G. C. . (2018). Asymmetric volatility transmission between the real exchange rate and stock returns in South Africa. Economic Analysis and Policy, 60, 1-8. doi:10.1016/j.eap.2018.08.002

Singh, D., Theivanayaki, M., and Ganeshwar, M. (2021). Examining Volatility Spillover Between Foreign Exchange Markets and Stock Markets of Countries such as BRICS Countries. Global Business Review 1 –21. DOI: 10.1177/09721509211020543

Sui, L., & Sun, L. (2015). Spillover effects between exchange rates and stock prices:Evidence from BRICS around the recent global financial crisis. Research in International Business and Finance, 36, 459–471. DOI: http://dx.doi.org/doi:10.1016/j.ribaf.2015.10.011

Tsen, W.H.. (2017). Real exchange rate returns and real stock price returns. International Review of Economics and Finance. http://dx.doi.org/10.1016/j.iref.2017.02.004

Yadav, M.P., Sharma, S., Aggarwal, V., and Bhardwaj, I. (2022). Correlations and volatility spillover from China to Asian and Latin American Countries: Identifying diversiﬁcation and hedging opportunities, Cogent Economics & Finance, 10:1, 2132634, DOI: 10.1080/23322039.2022.2132634