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

Kaynakça

1. Adjasi, Charles and Biekpe, Nicholas (2005), “Stock Market Returns and Exchange Rate Dynamics in Selected African Countries: A bivariate analysis,”
2. The African Finance Journal, Vol. 8, Part 2. Al-Khazali, Osamah (2003), “Stock prices, inflation and output: evidence from the emerging markets.” Journal of Emerging Market Finance,Vol. 2, No. 3, pp. 314.
3. Boucher, Christophe (2006), “Stock-price inflation puzzle and the predictability of the stock Market returns.” Economic Letters, Vol. 90, No. 20, pp. 205-212.
4. Campbell, John (1991), “A variance decomposition for stock returns,” Economic Journal, Vol. 101, No. 405, pp. 157-179.
5. Campbell, John and Ammer, John. (1993), “What moves the stock and bond markets? A variance decomposition for long-term asset returns,” Journal of
6. Finance, Vol. XLVIII, No.1, pp. 3-37. Campbell, John and Vuolteenaho, Tuomo (2004), “Inflation Illusion And Stock
7. Prices.” American Economic Review, Vol. 94, No. 2, pp. 19-23. Geetha, Carolina et al (2011), “The relationship between inflation and stock market: evidence from Malaysia, United States and China.” International Journal of Economics and Management Sciences. Vol.1, No. 2, pp. 1-16.
8. Geyser, Mariette and Lowies, Gert (2001), “The impact of inflation and stock prices in two SADC countries,” Meditari Accountancy Research, Vol. 9, No. 1, pp.109-122

9. Gregoriou, Andros and Kontonikas, Alexandros (2006), “Inflation targeting and the stationarity of inflation: new results from an ESTAR unit root test,” Bulletin of
10. Economic Research, Vol.58, No. 4, pp. 309-322. Hatemi-J, Abdulnasser and Irandoust, Manuchehr (2002), “On the Causality between Exchange Rates and Stock Prices: A Note,” Bulletin of Economic Research Vol. 54, No. 2, pp.197-203
11. Hendry, David and Richard, Jean (1983), “The econometric analysis of economic time series.” International Statistical Review, Vol. 51, No. 2, pp. 111-163.
12. Ito, Takatoshi and Yuko Hashimoto (2005), “High-Frequency Contagion of
13. Currency Crises in Asia ,” Asian Economic Journal, Vol. 19, No. 4, pp. 357-381
14. Kim, Ki-yo (2003), “Dollar Exchange Rate and Stock Price: Evidence from
15. Multivariate Cointegration and Error Correction Model,” Review of Financial Economics, Vol. 12, No. 3, pp. 301-313. Khalid, Ahmed and Kawai, Masahiro (2003), “Was financial market contagion the source of economic crisis in Asia?. Evidence using the multivariate VAR model.” Journal of Asian Economics. Vol. 14, No. 1, pp. 131 –156.
16. Mishra, Kumar (2004), “Stock Market and Foreign Exchange market in India: Are they related?” South Asia Economic Journal, Vol. 5, No.2, pp. 209-232.
17. Ozair, Amber, (2006). Causality Between Stock prices and Exchange Rates: A
18. Case of The United States. Florida Atlantic University, Masters Thesis. Pesaran, Hashem, Shin, Yongcheol and Smith, Richard (2001), “Bounds Testing
19. Approaches to the Analysis of Level Relationships.” Journal of Applied Econometrics. Vol.16, No. 3, pp. 289-326. Saryal, Fatma (2007), “Does inflation have an impact on Conditional Stock
20. Market Volatility? Evidence from Turkey and Canada.” International Research Journal of Finance and Economics. No.11, pp. 123-133. Tsoukalas, Dimitrios (2003), “Macroecomoic factors and stock prices in the emerging Cypriot equity market,” Managerial Finance Vol. 29, No. 4, pp. 87-92.