The relationship between the performance of Johannesburg Stock Exchange and economic growth in South Africa
This research focused on measuring the relationship between the Johannesburg stock market performance and economic growth as an option for boosting economic growth. Even though there have been a lot of studies with regards to the impact of Stock market growth to economic growth, very few of these have been directed to the Southern African nations. Second, these studies had different results, some suggesting a positive long-run relationship between the stock market and economic growth, and some established that there is no long-run relationship. The purpose of the research is to investigate the longrun and shortrun relationship between the JSE performance and economic growth in South Africa. It also investigates the direction of the causality between JSE’s overall performance and economic growth in South Africa. The research uses the ARDL bound cointegration model (Suggested by Pesaran, Shin & Smith 2001) to test the availability of a longrun relationship between the variables of stock market growth and economic growth on quarterly data from 2006 to 2018. The Granger causality test was used to test the pairwise relationships between the individual variables. The ARDL bounds testing results showed evidence of a longrun relationship between economic growth and the variables of stock market performance. The availability of a long-run relationship between the stock market and economic growth opens an avenue for policymakers that can be utilized for economic recovery. The Granger causality test showed evidence of a bidirectional causality between Economic growth and Gross Fixed Capital Formation and between Market capitalisation and JSE all share index. It also showed that Johannesburg Stock Exchange’s All share index (Jalsh) granger causes Economic growth. This relationship needs to be exploited so that it can benefit the economy in the longrun. The shortrun model showed that there is a relationship between economic growth and Gross Fixed Capital Formation and Labor Force. However, the relationship with the other measures of stock market performance is not clear in the shortrun with regression coefficients that are not statistically significant at 5% significant level. Fundamentally, the research revealed that the relationship between the stock market and economic growth depends on the proxies used to represent the stock market. This is important as it may be one of the reasons for mixed results in the previous literature, thus, caution is needed, and one may need to consider the proxy that best suits the stock market measure. The research adds to the already available literature and can be used as a reference point for other studies in the SADC region. The study offers a relevant solution to the allocation of financial resources with a goal to boost economic growth. It also illuminates the need for a well-developed financial system that allows for a smooth intermediation process complimenting stock market growth and thereby increasing economic growth.
A thesis submitted to the Wits Business School, Faculty of Commerce, Law and Management, University of Witwatersrand, in partial fulfillment of the requirements for the degree of Master of Management (in Finance and Investments), 2021