Impact of Macroeconomic and Climate Change Factors on Stock Market Activity: Evidence from BRICS Countries

Abstract

This study dives into the intricate dynamics between macroeconomic variables, climate change indicators, and stock market returns within emerging economies which focuses on BRICS nations alongside the newly inducted members: Saudi Arabia, UAE, Iran, and Egypt. Utilizing a robust dataset spanning from 1999 to 2022, the research employs advanced econometric techniques, specifically the Generalized Method of Moments (GMM), to analyze both short-term (2016–2022) and long-term (1999–2022) trends. This dual approach provides a comprehensive understanding of how economic and environmental variables influence financial markets over time.

The results underscore a complex interplay of factors. Inflation exhibits mixed effects, reflecting its multifaceted role in shaping investor sentiment and market performance. While inflationary pressures often erode purchasing power and profitability, they can also signal economic growth which leads to divergent outcomes across different models. The exchange rate emerges as a pivotal factor in short-term analyses, exerting a significant influence due to its immediate impact on foreign investment flows and trade balances. However, its role diminishes in the long-term perspective, likely due to the market's adaptation to exchange rate volatility over time.

Climate change variables, particularly greenhouse gas emissions and renewable energy adoption, demonstrate pronounced effects in the long-run panel analysis. The findings suggest that while environmental factors may not exert immediate influence, their cumulative impact becomes increasingly evident as economies transition toward sustainability. For instance, a higher reliance on renewable energy indicates progressive environmental policies, aligning with global sustainability goals and fostering investor confidence in green industries. Conversely, elevated greenhouse gas emissions signal environmental risks that may deter long-term investments.

The implications of this research are not only practical but also far-reaching for policymakers. The study offers actionable insights into crafting strategies that balance economic growth with environmental sustainability. Stabilizing macroeconomic fundamentals, such as inflation and exchange rates, meanwhile promoting renewable energy adoption, can create resilient financial markets for investors. Understanding the nuanced relationships between these variables enables better risk assessment and portfolio diversification, particularly in emerging markets characterized by volatility and rapid growth.

By bridging significant gaps in the literature, this research makes a valuable contribution to the understanding of stock market dynamics in emerging economies. The inclusion of climate change variables alongside traditional macroeconomic indicators adds depth to the analysis, offering a holistic view of the forces shaping financial markets. Moreover, the integration of not only short-term but also long-term perspectives highlights the evolving nature of these relationships, equipping stakeholders with the knowledge to navigate the complexities of a rapidly changing impact on global economic and environmental landscape.