Advanced Search
MyIDEAS: Login to save this paper or follow this series

Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model

Contents:

Author Info

  • Goodness C. Aye

    ()
    (Department of Economics, University of Pretoria, South Africa)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Mampho P. Modise

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper investigates the existence of spillovers from stock prices onto consumption and the interest rate for South Africa using a time-varying vector autoregressive (TVP-VAR) model with stochastic volatility. In this regard, we estimate a three-variable TVP-VAR model comprising of real consumption growth rate, the nominal three-months Treasury bill rate and the growth rate of real stock prices. We find that the impact of a real stock price shocks on consumption is in general positive, with large and significant effects observed at the one-quarter ahead horizon. However, there is also evidence of significant negative spillovers from the stock market to consumption during the financial crisis, at both short and long-horizons. Monetary policy response to stock price shocks has been persistent, and strong especially post-the financial liberalization in 1985, but became weaker during the financial crisis. Overall, we provide evidence of significant time-varying spillovers on consumption and interest rate from the stock market.

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201224.

as in new window
Length: 14 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:pre:wpaper:201224

Contact details of provider:
Postal: PRETORIA, 0002
Phone: (+2712) 420 2413
Fax: (+2712) 362-5207
Web page: http://web.up.ac.za/default.asp?ipkCategoryID=677
More information through EDIRC

Related research

Keywords: Bayesian Inference; Consumption; Stock Price; Markov Chain Monte Carlo; Monetary Policy; Structural Vector Autoregression; Stochastic Volatility; Time-Varying Paremeter;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Christiane Baumeister & Eveline Durinck & Gert Peersman, 2008. "Liquidity, inflation and asset prices in a time-varying framework for the euro area," Working Paper Research, National Bank of Belgium 142, National Bank of Belgium.
  2. Frederic S. Mishkin & Eugene N. White, 2002. "U.S. Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," NBER Working Papers 8992, National Bureau of Economic Research, Inc.
  3. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, American Economic Association, vol. 94(1), pages 276-299, March.
  4. Sousa, Ricardo M., 2010. "Consumption, (dis)aggregate wealth, and asset returns," Journal of Empirical Finance, Elsevier, Elsevier, vol. 17(4), pages 606-622, September.
  5. Emma M. Iglesias & Andre Yone Haughton, 2013. "Interaction between monetary policy and stock prices: a comparison between the Caribbean and the US," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 23(6), pages 515-534, March.
  6. Fratzscher, Marcel & Juvenal, Luciana & Sarno, Lucio, 2009. "Asset Prices, Exchange Rates and the Current Account," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7614, C.E.P.R. Discussion Papers.
  7. Nicholas Apergis & Stephen M. Miller, 2005. "Consumption asymmetry and the stock market: New evidence through a threshold adjustment model," Working papers, University of Connecticut, Department of Economics 2005-08, University of Connecticut, Department of Economics.
  8. Bjørnland , Hilde & Leitemo, Kai, 2005. "Identifying the interdependence between US monetary policy and the stock market," Research Discussion Papers, Bank of Finland 17/2005, Bank of Finland.
  9. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 56(3), pages 815-849, 06.
  10. Sousa, Ricardo M., 2009. "Wealth effects on consumption: evidence from the euro area," Working Paper Series, European Central Bank 1050, European Central Bank.
  11. Afonso, António & Sousa, Ricardo M., 2011. "What are the effects of fiscal policy on asset markets?," Economic Modelling, Elsevier, Elsevier, vol. 28(4), pages 1871-1890, July.
  12. Christopher D. Carroll & Misuzu Otsuka & Jiri Slacalek, 2011. "How Large Are Housing and Financial Wealth Effects? A New Approach," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(1), pages 55-79, 02.
  13. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 813-36, July.
  14. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, National Bureau of Economic Research, Inc, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  15. Clive Coetzee, 2002. "Monetary Conditions and Stock Returns: A South African Case Study," Finance, EconWPA 0205002, EconWPA.
  16. C. Baumeister & G. Peersman, 2008. "Time-Varying Effects of Oil Supply Shocks on the US Economy," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 08/515, Ghent University, Faculty of Economics and Business Administration.
  17. Luca Agnello & Vítor Castro & Ricardo M. Sousa, 2011. "How Does Fiscal Policy React to Wealth Composition and Asset Prices?," NIPE Working Papers, NIPE - Universidade do Minho 24/2011, NIPE - Universidade do Minho.
  18. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 979, Cowles Foundation for Research in Economics, Yale University.
  19. Ruthira Naraidoo & Kasai Ndahiriwe, 2010. "Financial asset prices, linear and nonlinear policy rules. An In-sample assessment of the reaction function of the South African Reserve Bank," Working Papers, University of Pretoria, Department of Economics 201006, University of Pretoria, Department of Economics.
  20. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1519-1554, November.
  21. Nicholas Apergis & Stephen M. Miller, 2005. "Resurrecting the Wealth Effect on Consumption: Further Analysis and Extension," Working papers, University of Connecticut, Department of Economics 2005-57, University of Connecticut, Department of Economics.
  22. Christiane Baumeister & Gert Peersman, 2013. "The Role Of Time‐Varying Price Elasticities In Accounting For Volatility Changes In The Crude Oil Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 28(7), pages 1087-1109, November.
  23. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Wealth Effects in Emerging Market Economies," NIPE Working Papers, NIPE - Universidade do Minho 4/2009, NIPE - Universidade do Minho.
  24. Christophe Andre & Rangan Gupta & Patrick T. Kanda, 2012. "Do House Prices Impact Consumption and Interest Rate? Evidence from OECD Countries using an Agnostic Identification Procedure," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, Duncker & Humblot, Berlin, vol. 58(1), pages 19-70.
  25. Jouchi Nakajima, 2011. "Time-Varying Parameter VAR Model with Stochastic Volatility: An Overview of Methodology and Empirical Applications," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 11-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  26. Guglielmo Maria Caporale & Ricardo M. Sousa, 2011. "Consumption, Wealth, Stock and Housing Returns: Evidence from Emerging Markets," NIPE Working Papers, NIPE - Universidade do Minho 32/2011, NIPE - Universidade do Minho.
  27. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  28. Sonali Das & Rangan Gupta & Patrick T Kanda, 2010. "Bubbles in South African House Prices and their Impact on Consumption," Working Papers, University of Pretoria, Department of Economics 201017, University of Pretoria, Department of Economics.
  29. Agnello, L. & Sousa, R., 2011. "Can Fiscal Policy Stimulus Boost Economic Recovery?," Working papers, Banque de France 325, Banque de France.
  30. Koivu, Tuuli, 2012. "Monetary policy, asset prices and consumption in China," Economic Systems, Elsevier, Elsevier, vol. 36(2), pages 307-325.
  31. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
  32. Vítor Castro & Ricardo M. Sousa, 2010. "How Do Central Banks React to Wealth Composition and Asset Prices?," NIPE Working Papers, NIPE - Universidade do Minho 26/2010, NIPE - Universidade do Minho.
  33. William J. Crowder, 2006. "The Interaction Of Monetary Policy And Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 29(4), pages 523-535.
  34. Ruthira Naraidoo & Leroi Raputsoane, 2010. "Zone‐Targeting Monetary Policy Preferences And Financial Market Conditions: A Flexible Non‐Linear Policy Reaction Function Of The Sarb Monetary Policy," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 78(4), pages 400-417, December.
  35. Ricardo M. Sousa, 2010. "How do Consumption and Asset Returns React to Wealth Shocks? Evidence from the U.S. and the U.K," NIPE Working Papers, NIPE - Universidade do Minho 14/2010, NIPE - Universidade do Minho.
  36. Daria Finocchiaro & Virginia Queijo Heideken, 2013. "Do Central Banks React to House Prices?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 45(8), pages 1659-1683, December.
  37. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number frie57-1.
  38. Luca Agnello & Ricardo M. Sousa, 2013. "Fiscal Policy And Asset Prices," Bulletin of Economic Research, Wiley Blackwell, Wiley Blackwell, vol. 65(2), pages 154-177, 04.
  39. Apergis, Nicholas & Miller, Stephen M., 2006. "Consumption asymmetry and the stock market: Empirical evidence," Economics Letters, Elsevier, Elsevier, vol. 93(3), pages 337-342, December.
  40. Kasai Ndahiriwe & Ruthira Naraidoo, 2011. "The Opportunistic approach to monetary policy and financial markets," Working Papers, University of Pretoria, Department of Economics 201103, University of Pretoria, Department of Economics.
  41. António Afonso & Ricardo M. Sousa, 2011. "Consumption, Wealth, Stock and Government Bond Returns: International Evidence," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2011/09, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  42. Nicholas Apergis & Stephen M. Miller, 2004. "Consumption Asymmetry and the Stock Market: Further Evidence," Working papers, University of Connecticut, Department of Economics 2004-19, University of Connecticut, Department of Economics.
  43. Christiane Baumeister & Luca Benati, 2013. "Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 165-212, June.
  44. Fratzscher, Marcel & Straub, Roland, 2010. "Asset Prices, News Shocks and the Current Account," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8080, C.E.P.R. Discussion Papers.
  45. Sousa, Ricardo M., 2010. "Housing wealth, financial wealth, money demand and policy rule: Evidence from the euro area," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 21(1), pages 88-105, March.
  46. Z. Chinzara, 2010. "Macroeconomic uncertainty and emerging market stock market volatility: The case for South Africa," Working Papers, Economic Research Southern Africa 187, Economic Research Southern Africa.
  47. Bhupal Singh, 2012. "How important is the stock market wealth effect on consumption in India?," Empirical Economics, Springer, Springer, vol. 42(3), pages 915-927, June.
  48. Oreste Napolitano, 2009. "Is the impact of the ECB Monetary Policy on EMU stock market returns asymmetric?," STUDI ECONOMICI, FrancoAngeli Editore, FrancoAngeli Editore, vol. 0(97), pages 145-180.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Gupta, Rangan & Modise, Mampho P., 2013. "Does the source of oil price shocks matter for South African stock returns? A structural VAR approach," Energy Economics, Elsevier, Elsevier, vol. 40(C), pages 825-831.
  2. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel Abidin Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working papers, University of Connecticut, Department of Economics 2012-27, University of Connecticut, Department of Economics.
  3. Goodness C. Aye & Rangan Gupta & Alain Kaninda & Wendy Nyakabawo & Aarifah Razak, 2013. "House Price, Stock Price and Consumption in South Africa: A Structural VAR Approach," Working Papers, University of Pretoria, Department of Economics 201309, University of Pretoria, Department of Economics.
  4. Alexander Zimper, 2013. "The minimal confidence levels of Basel capital regulation," Working Papers, University of Pretoria, Department of Economics 201305, University of Pretoria, Department of Economics.
  5. Chance Mwabutwa & Manoel Bittencourt & Nicola Viegi, 2013. "Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR Approach," Working Papers, University of Pretoria, Department of Economics 201327, University of Pretoria, Department of Economics.
  6. Rangan Gupta & Charl Jooste & Kanyane Matlou, 2013. "A Time-Varying Approach to Analysing Fiscal Policy and Asset Prices in South Africa," Working Papers, University of Pretoria, Department of Economics 201303, University of Pretoria, Department of Economics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pre:wpaper:201224. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rangan Gupta).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.