The dynamic relationship between economic factors and the South African stock market

Abstract

This study examines the long-term equilibrium relationship between macroeconomic variables and the Johannesburg Stock Exchange (JSE) using quarterly data from 1994 to 2012. The macroeconomic variables tested are inflation, the short-term interest rate, the long-term interest rate, the foreign exchange rate, the money supply, industrial production, the Gross Domestic Product (GDP), the oil price and the gold price. A Vector Error Correction Model (VECM) is employed to determine the long-run equilibrium relationship and any short-run interactions among the variables. The results indicate that the JSE has significant positive long-run relationships with inflation and GDP and a significant negative relationship with the money supply. The results imply that a multi-factor model is appropriate for asset pricing in South Africa.