INFLATION AND STOCK PRICES INTERACTIONS IN SOUTH AFRICA: VAR ANALYSIS

Year 2013, Volume: 5 Issue: 2, 23 - 34, 01.12.2013

John Khumalo

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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