Title: Risk ratings and stock prices: the causal nexus in BRICS countries

Authors: Rudra P. Pradhan; John H. Hall; Flávio De São Pedro Filho; Tawose Joseph

Addresses: Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur WB 721302, India ' Department of Financial Management, University of Pretoria, Pretoria, Private Bag X20 Hatfield, Pretoria 0028, Republic of South Africa ' Universidade Federal de Rondônia, Campus José Ribeiro Filho, BR 364, KM 9,5, Via de Acessopara o Acre, Porto Velho City, Estado de Rondônia, CEP 76800-000, Brazil ' Department of Economics, Ekiti State University, Ado-Ekiti, Nigeria

Abstract: This paper investigates the nature of causal relations between risk (economic risk, financial risk and political risk) and stock prices in five BRICS countries (Brazil, Russia, India, China and South Africa), applying the Granger causality test over a period of 20 years from 1992 to 2012. The study bridges a gap in the literature, as prior macroeconomic empirical investigation has been limited to a possible link between risk ratings and stock prices. Our modelling includes BRICS stock price indices and three risk ratings, namely economic risk ratings, financial risk ratings, and political risk ratings. To achieve our objective, two econometric methodologies were adopted: cross-country regressions and time series regressions. The empirical results of this study indicate that for Russia and China (and the BRICS counties as a group), there is a unidirectional causality between political risk and economic risk. Another noteworthy result was the fact that a unidirectional causality between economic risk and share prices were found for India and China (and the BRICS countries as a group), but not for the other countries under review. This indicates the important role that the stock market plays in the economies of India and China and hence provides an extra caution for prospective investors in these countries.

Keywords: risk ratings; BRICS countries; stock prices; Brazil; Russia; India; China; South Africa; modelling; economic risk; financial risk; political risk; Granger causality test; econometrics; stock markets; prospective investors.

DOI: 10.1504/IJBAAF.2014.067021

International Journal of Banking, Accounting and Finance, 2014 Vol.5 No.4, pp.435 - 459

Received: 02 Mar 2014
Accepted: 11 Sep 2014
Published online: 31 Jan 2015 *

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