INFLATION AND STOCK PRICES INTERACTIONS IN SOUTH AFRICA: VAR ANALYSIS

Abstract

The study is based on the time series analysis of stock prices in South Africa. It uses the data covering the period 1980Q1 to 2010Q4 to test the effect of inflation on stock prices. The analysis is done using Auto-Regressive Distributed Lag Model (ARDL). First, we investigate time series properties of data. The unit root test results reveal stock prices, interest rate, economic growth and real effective exchange rate are integrated of order zero ~I(0), while the growth of money supply and inflation are ~I(1). Causality test suggests a unidirectional causation from inflation to stock prices. The establishment of the longrun relationship leads us to performing VECM to establish short-run and long-run dynamics. Our results indicate that inflation exerts a significant and negative impact on stock prices in South Africa.

Keywords

• Stock prices, inflation, causality, cointegration, VECM, VAR

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