The Impact of Macroeconomic Variables on Industrial Shares Listed on the JSE

Abstract

This study investigates the causal relationships, both long run and short run between the Industrial Index 25 and some macroeconomic variables in South Africa. Quarterly data from all the variables was collected from 1995 Q3 (September) to 2015 Q2 (June). Included in the set of macroeconomic variables used in this study are gross domestic product (GDP), inflation (CPI), prime rates and exchange rates. Statistical techniques applied in order to analyse the relationship between stock returns and macroeconomic variables include Augmented Dickey Fuller (ADF) unit root tests, correlation analysis, Johansen cointegration test, Vector error correction (VECM) and Granger causality tests in a multivariate framework. Results show that inflation significantly increases stock prices, hence investors get some inflationary compensation. Interest rates are shown to have a negative relationship between, suggestive of the substitution between stocks and interest bearing securities when interest rates increase. On the other hand, exchange rates have a positive effect on the INDI25, whilst there is no relationship between INDI 25 and GDP. Two error correction terms were obtained from the VECM. Whilst the first one was insignificant and failed to indicate any long -run relationship, the other term was significant, indicating short term adjustments and the presence of a long run relationship from GDP, CPI, prime rates and exchange rates to INDI 25. Results from Granger causality showed only univariate causality from INDI 25 to prime rates.